Fannie and Freddie Should Hold Billions in Capital, FHFA Says

(Bloomberg) -- Fannie Mae and Freddie Mac’s regulator is proposing that the mortgage-finance giants have a combined capital buffer of as much as $180.9 billion should the companies be released from government control.

The capital requirement, which the Federal Housing Finance Agency proposed Tuesday, would be suspended as long as the companies remain in federal conservatorship. But implementing such a demand would still have implications for the prices that Fannie and Freddie charge to guarantee mortgages. The rule could also help guide policy makers as they determine the future of the U.S. housing-finance system, which is dominated by Fannie, Freddie and other government-backed agencies.

FHFA Director Mel Watt first told the Senate Banking Committee last month that he was developing the rule. The companies could have a minimum leverage capital requirement of between $103.5 billion and $139.5 billion combined.

“We think it is important for FHFA, as the prudential regulator for Fannie Mae and Freddie Mac, to articulate our views on capital requirements and to start a healthy discussion about the amount of capital the enterprises should have to appropriately shield taxpayers,” Watt said in a statement on Tuesday.

Fannie and Freddie don’t make loans themselves. They buy mortgages from lenders, wrap them into securities and make guarantees to investors in case the loans default. Together, the companies back nearly $5 trillion in mortgages.

Under the current terms of their bailout agreements, Fannie and Freddie are allowed to keep as much as $3 billion each in capital to protect against small operating losses. They send nearly all of their profits to the U.S. Treasury, which is committed to providing the companies as much as $254 billion combined to cover greater losses should they need it.

The FHFA on Tuesday presented two options for Fannie and Freddie’s capital. The first represented 2.5 percent of the companies’ total assets and off-balance sheets guarantees, which was $139.5 billion based on their 2017 book of business, according to the FHFA. The second option was 1.5 percent of the companies’ trust assets and 4 percent of their non-trust assets, which would have been $103.5 billion, the FHFA said.

The $180.9 billion risk-based capital requirement was 3.24 percent of the companies’ total assets and off-balance guarantees, the FHFA said.

The FHFA said the options would have protected each company during the financial crisis if they had been subject to the rule in 2007.

The FHFA said it would take comments on the proposed rule for 60 days.

©2018 Bloomberg L.P.