The Federal Housing Finance Agency has been reworking the capital rule for Fannie Mae and Freddie Mac. The initial version of the rule was expected to be out by the end of this month or early next month, but it’s been delayed.
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Fannie Mae, Freddie Mac capital rules delayed
FHFA Director Mark Calabria has delayed the release of Fannie Mae's and Freddie Mac's capital rules until the second half of May. He cited delays due to the coronavirus as the agency has been unable to hold meetings and seek public comment on the Fannie Mae and Freddie Mac capital rules.
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Despite the delay in the release of the first version of the capital rule, ACG Analytics said in a note today that it is still possible to finalize the rule by the end of the year. The comment period will be 60 days long, so there is plenty of time. However, the firm also said another delay in the rule's release is possible.
Parts of the capital rule
Tim Pagliara and Grant Stark of CapWealth Advisors offered further insight on the Fannie Mae and Freddie Mac capital rules. They said the GSEs underwent a stress test like the nation's big banks in August, which revealed how much money they would lose in terrible economic conditions. That test became a starting point for how much capital they will need.
AGC released a reform timeline for the government-sponsored enterprises with further details about the capital rule, which will come in several parts. As of the end of December, Fannie Mae had $14.67 billion in capital, while Freddie Mac had $9.1 billion.
Stark noted that it's important to point out that even in 2008, Fannie and Freddie would've survived without government intervention. He said they had plenty of capital at that time. While most banks were facing a liquidity crisis, the GSEs were dealing with accounting problems.
Fannie Mae's and Freddie Mac's numbers
The critical capital level, which is the amount the GSEs need to exit conservatorship, is estimated at around $11.19 billion for Fannie Mae. Stress test capital, which is the amount of capital needed to survive severe economic hardship, is estimated at about $26.1 billion.
Regulatory capital, which is the amount of capital necessary after taking into account the stress test results, is estimated at about $75 billion for Fannie Mae. The regulatory capital level amounts to the total from the stress test, plus an additional cushion to avoid regulatory intervention, Pagliara explained. The statutory minimum amount of capital is estimated at $22.39 billion. Pagliara explained that this is "the amount they need to keep the regulators in the parking lot and out of the building."
For Freddie Mac, the critical capital level is estimated at $9.56 billion. The stress test level is estimated at $17.2 billion. The regulatory capital level is estimated at $50 billion, while Freddie's statutory minimum is estimated at $19.12 billion.
One other factor in the Fannie Mae, Freddie Mac capital rule
Pagliara also pointed out another factor in determining the capital rules for Fannie Mae and Freddie Mac. He noted that Calabria's primary job is to protect the taxpayer and make the GSEs stable enough that the government won't have to step in again. He also pointed out that Calabria will have to be precise about where he sets the capital requirements.
"He doesn't want to require them to have too much capital because it makes it more difficult to attract investor money," Pagliara told ValueWalk in an interview.