Changes to the GSEs Capital Rules and How they AFfect the Lending Landscape.

In mid-September, the FHFA proposed the amendment of the regulatory minimum capital requirement that applied to the two government-backed enterprises Freddie Mac and Fannie Mae. This requirement is called the enterprise capital rule (ECR). While many assume that the amendment will significantly reduce the total capital required by the enterprises, the real aim of it is to remove harmful distortions that create some form of monetary reward for the two government-backed agencies to hold high-risk assets. This, in our opinion is counter productive.

The ECR is a well-known rule that politicizes the housing policy in the country. The first ECR proposal was in 2018, when the FHFA director Mel Watt, called for a total capital requirement based on last September’s GSE balance sheets. It was later revised to reflect 2017’s tax rate changes. Everyone appraised the proposal, considering that it would cover stressed-market losses and provide the GSEs with incentives to manage their risks. However, there were some concerns as to whether the GSEs would raise enough capital to pull them through in bad times. The final changes were not made to the proposal until Watt left office.

CALABRIA REVISES THE ECR PROPOSAL

Former President Donald Trump appointed Mark Calabria to be the next FHFA director, a year before the country’s general elections. Mark Calabria had a history of making comments that was tailored towards eliminating the role of Fannie Mae and Freddie Mac in mortgage markets. In his tenure, the FHFA revised the ECR proposal and proposed a new rule to establish modern minimum regulatory capital requirements.

Since the government-backed enterprises own about 45% of all outstanding single-family mortgages in the United States, the rule could affect the housing finance and impact how the companies can act in the future. This will most likely translate into an increased cost for a mortgage. According to public comments, the proposal was thorough and well thought, but had some complicated risk-based capital requirement calculations. Calabria published the final rule six months later.

The final rule intended to address three critical issues; the total amount of capital required was too high, the specifics of the risk-based capital requirement were distorted and weren’t in line with the GSEs risk-monetary rewards, and the high leverage capital requirement. However, Calabria and the FHFA ignored some of these feedback and proceeded to publish the final ECR rule. It was obvious that the rule would be revised once Calabria’s tenure elapses.

President Biden appointed Sandra Thompson as Acting Director in June, and immediately, she sought to make some provisions to Calabria’s earlier published rules. It’s likely that the technical issues ignored by the past director would be addressed for the better running of the GSEs.

Provided that you fulfill all the requirements, you can be eligible for a mortgage loan. Thankfully, the interest rates are low, so you can make good use of this opportunity to get a home. For the best affordable property, you need an experienced real estate expert to search for the ideal one for you. Take your chance and contact us.

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The Power Is Now Media is an online multimedia company founded in 2009 by Eric L. Frazier, MBA, and is headquartered in Riverside, California. We are advocates for homeownership, wealth building, and financial literacy for low to moderate-income and minority communities. The Power Is Now Media corporate office is located at 3739 6th Street Riverside, CA 92501. Ph: 800-4018994 Website: www.thepowerisnow.com.

Published by Eric Lawrence Frazier, MBA.

Reference

https://www.jchs.harvard.edu/blog/newly-proposed-changes-gse-capital-rulewill-eliminate-harmful-distortions