Fannie and Freddie pose risk to financial system, panel says in “landmark” discovery

Fannie and Freddie have been at the center of a heated debate between Republicans and Democrats since the government saved the two companies from collapse in the 2008 financial crisis. Republicans have pushed to increase their capital to prepare them for privatization . But some Democrats and affordable housing advocates warn that the stricter capital requirements could drive up the cost of mortgages and limit Fannie and Freddie’s ability to serve low-income communities.

Fannie and Freddie don’t make home loans, but rather buy mortgages from lenders and bundle them into securities for sale in the secondary market. This allows lenders to make more loans.

Federal Housing Finance Agency director Mark Calabria, the Fannie and Freddie regulator who proposed the stricter capital standard, applauded the announcement at a public council meeting. Calabria, a person named by Trump, has long pushed for a deeper examination of the mortgage market.

“I congratulate the council for its historic recognition that [Fannie and Freddie’s] activities could pose a risk to financial stability, ”Calabria said. “Today’s announcement is an important and necessary step to reform and protect the housing finance system so that the [companies] can continue to serve the market during crises.

The board – which is chaired by Treasury Secretary Steven Mnuchin – unanimously endorsed the review’s findings, described in a four-page statement released after markets close for the day.

The statement is light on the details. But it does give weight to Calabria’s efforts to reshuffle business and policy coverage to move forward with a proposal to increase their capital needs.

The review gives the Treasury and the FHFA “the explicit support of other financial regulators to both finalize the capital rule this year and advance policies that will lead to the capitalization of the [companies]”said Isaac Boltansky, policy analyst at Compass Point Research.

The statement also puts “a floor below the capital rule proposed by the FHFA” and makes it more likely that the rule will be finalized without major revisions, Boltansky added.

The FSOC has explicitly supported Calabria’s preferred capital levels, warning that any ‘capital and leverage ratio requirements that are significantly lower than those contemplated by the proposed rule would likely not adequately mitigate the potential stability risk. “.

The proposed rule would require companies to maintain capital equivalent to 4% of their assets under normal economic conditions, meaning they would have to hold around $ 240 billion to support their combined $ 6.1 trillion in assets, that’s about five times what they have today.

“The next critical step will be to finalize the capital rule with the benefit of the board’s valuable recommendations,” Calabria said. The agency is working to complete the rule by the end of the year.

The mortgage market review is the first of its kind. The FSOC has the power to designate for tighter supervision both individual institutions and activities that it considers likely to destabilize the financial system.

The panel – created by the Dodd-Frank Financial Regulation Act of 2010 – rotated in December to focus on activities rather than specific companies, following complaints from companies that monitoring was too onerous.

The FSOC is committed to continuing to monitor the secondary mortgage market and to “consider more formal recommendations or other actions” if the FHFA fails to mitigate the risks.

Source link

Don F. Davis