[Federal Register Volume 86, Number 184 (Monday, September 27, 2021)]
[Proposed Rules]
[Pages 53230-53246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-20297]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 /
Proposed Rules
[[Page 53230]]
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1240
RIN 2590-AB17
Enterprise Regulatory Capital Framework Rule--Prescribed Leverage
Buffer Amount and Credit Risk Transfer
AGENCY: Federal Housing Finance Agency.
ACTION: Notice of proposed rulemaking: request for comments.
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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is
seeking comments on a notice of proposed rulemaking (proposed rule)
that would amend the Enterprise Regulatory Capital Framework (ERCF) by
refining the prescribed leverage buffer amount (PLBA or leverage
buffer) and credit risk transfer (CRT) securitization framework for the
Federal National Mortgage Association (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac, and with Fannie Mae, each an
Enterprise). The proposed rule would also make technical corrections to
various provisions of the ERCF that was published on December 17, 2020.
DATES: Comments must be received on or before November 26, 2021.
ADDRESSES: You may submit your comments on the proposed rule,
identified by regulatory information number (RIN) 2590-AB17, by any one
of the following methods:
Agency Website: www.fhfa.gov/open-for-comment-or-input.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by email
to FHFA at [email protected] to ensure timely receipt by FHFA.
Include the following information in the subject line of your
submission: Comments/RIN 2590-AB17.
Hand Delivered/Courier: The hand delivery address is:
Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AB17,
Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC
20219. Deliver the package at the Seventh Street entrance Guard Desk,
First Floor, on business days between 9 a.m. and 5 p.m.
U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Clinton Jones,
General Counsel, Attention: Comments/RIN 2590-AB17, Federal Housing
Finance Agency, 400 Seventh Street SW, Washington, DC 20219. Please
note that all mail sent to FHFA via U.S. Mail is routed through a
national irradiation facility, a process that may delay delivery by
approximately two weeks. For any time-sensitive correspondence, please
plan accordingly.
FOR FURTHER INFORMATION CONTACT: Andrew Varrieur, Senior Associate
Director, Office of Capital Policy, (202) 649-3141,
[email protected]; Christopher Vincent, Senior Financial
Analyst, Office of Capital Policy, (202) 649-3685,
[email protected]; or James Jordan, Associate General
Counsel, Office of General Counsel, (202) 649-3075,
[email protected]. These are not toll-free numbers. The telephone
number for the Telecommunications Device for the Deaf is (800) 877-
8339.
SUPPLEMENTARY INFORMATION:
Comments
FHFA invites comments on all aspects of the proposed rule. Copies
of all comments will be posted without change and will include any
personal information you provide, such as your name, address, email
address, and telephone number, on the FHFA website at https://www.fhfa.gov. In addition, copies of all comments received will be
available for examination by the public through the electronic
rulemaking docket for this proposed rule also located on the FHFA
website.
Table of Contents
I. Introduction
II. Background and Rationale for the Proposed Rule
A. PLBA
B. CRT
III. Proposed Requirements
A. PLBA
B. CRT
C. ERCF Technical Corrections
IV. Paperwork Reduction Act
V. Regulatory Flexibility Act
I. Introduction
FHFA is seeking comments on amendments to the ERCF that would
refine the leverage buffer and the risk-based capital treatment for CRT
transactions. The proposed amendments would better reflect the risks
inherent in the Enterprises' business models and encourage the
Enterprises to distribute acquired credit risk to private investors
rather than to buy and hold that risk. The dynamic PLBA considered in
this proposed rule is intended to achieve FHFA's objective stated in
the ERCF of having the Enterprises' leverage capital requirements
provide a credible backstop to risk-based capital requirements. Linking
the PLBA to the ERCF's stability capital buffer, in conjunction with
the proposed rule's refinements to the ERCF's CRT securitization
framework, would enhance the safety and soundness of the Enterprises by
removing inappropriate capital disincentives to the Enterprises to
transfer risk.
FHFA adopted the ERCF on December 17, 2020 (85 FR 82150), with the
purpose of implementing a going-concern regulatory capital standard to
ensure that each of Fannie Mae and Freddie Mac operates in a safe and
sound manner and is positioned to fulfill its statutory mission to
provide stability and ongoing assistance to the secondary mortgage
market across the economic cycle. In doing so, the ERCF accomplished a
statutory requirement that FHFA establish by regulation risk-based
capital requirements to safeguard the Enterprises against the risks
that arise in the operation and management of their businesses, and
implemented a new leverage framework that included both a minimum
requirement and a leverage buffer. The ERCF became effective on
February 16, 2021.
The ERCF evolved from FHFA's proposals for Enterprise Regulatory
Capital Frameworks in 2018 and 2020, which were based on the FHFA
Conservatorship Capital Framework (CCF) established in 2017. The ERCF
successfully addressed issues identified through the notice and comment
process on the pro-cyclicality of the proposed risk-based capital
requirements, the quality of Enterprise capital used to meet the
capital
[[Page 53231]]
requirements, and the quantity of capital requirements.
However, FHFA is concerned that certain aspects of the ERCF might
create disincentives in the Enterprises' CRT programs that may result
in taxpayers bearing excessive undue risk for as long as the
Enterprises are in conservatorships and excessive risk to the housing
finance market both during and after conservatorships. This concern is
heightened by the fact that the Enterprises presently are severely
undercapitalized and lack the resources on their own to safely absorb
the credit risk associated with their normal operations. In
conservatorships, the Enterprises are supported by Senior Preferred
Stock Purchase Agreements \1\ (PSPAs) between the U.S. Department of
the Treasury (the Treasury) and each Enterprise, through FHFA as its
conservator. Until recently, the PSPAs significantly limited the
Enterprises' ability to hold capital, and only in January 2021 were the
upper bounds on retained capital removed. During this period where the
Enterprises are building capital, the taxpayers continue to be at
heightened risk through potential PSPA draws in the event of a
significant stress to the housing sector. The Enterprises have
developed their CRT programs over the last several years under FHFA's
oversight through guidelines, instructions, strategic plans, and
scorecard objectives. FHFA views the transfer of risk, particularly
credit risk, to a broad set of investors as an important tool to reduce
taxpayer exposure to the risks posed by the Enterprises and to mitigate
systemic risk caused by the size and monoline nature of the
Enterprises' businesses. If the Enterprises were to substantially
shrink their risk transfer programs for an extended period, either in
response to regulatory policies or macroeconomic conditions, potential
taxpayer exposure and systemic risk may increase as a result.
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\1\ Fannie Mae's Amended and Restated Senior Preferred Stock
Purchase Agreement with Treasury (September 26, 2008), https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/FNM/SPSPA-amends/FNM-Amend-and-Restated-SPSPA_09-26-2008.pdf;
Freddie Mac's Amended and Restated Senior Preferred Stock Purchase
Agreement with Treasury (September 26, 2008), https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/FRE/SPSPA-amends/FRE-Amended-and-Restated-SPSPA_09-26-2008.pdf.
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The refinements in this proposal would lessen the potential
deterrents to Enterprise risk transfer. Specifically, the proposed rule
would amend the ERCF to:
Replace the fixed PLBA equal to 1.5 percent of an
Enterprise's adjusted total assets with a dynamic PLBA equal to 50
percent of the Enterprise's stability capital buffer as calculated in
accordance with 12 CFR 1240.400;
Replace the prudential floor of 10 percent on the risk
weight assigned to any retained CRT exposure with a prudential floor of
5 percent on the risk weight assigned to any retained CRT exposure; and
Remove the requirement that an Enterprise must apply an
overall effectiveness adjustment to its retained CRT exposures in
accordance with the ERCF's securitization framework in 12 CFR
1240.44(f) and (i).
The proposed rule would also make technical corrections to various
provisions of the ERCF that was published on December 17, 2020.
The PSPAs between the Treasury and each Enterprise, through FHFA as
its conservator, as amended by letter agreements executed by the
parties on January 14, 2021,\2\ include a covenant at section 5.15
which states: ``[The Enterprise] shall comply with the Enterprise
Regulatory Capital Framework [published in the Federal Register at 85
FR 82150 on December 17, 2020] disregarding any subsequent amendment or
other modifications to that rule.'' Modifying that covenant will
require agreement between the Treasury and FHFA under section 6.3 of
the PSPAs.
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\2\ 2021 Fannie Mae Letter Agreement (January 14, 2021), https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Fannie-Mae.pdf; 2021 Freddie Mac Letter Agreement (January 14.
2021), https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Freddie%20Mac.pdf.
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II. Background and Rationale for the Proposed Rule
A. PLBA
Background
The ERCF requires an Enterprise to maintain a leverage ratio of
tier 1 capital to adjusted total assets of at least 2.5 percent. In
addition, to avoid limits on capital distributions and discretionary
bonus payments, an Enterprise must also maintain a fixed tier 1 capital
PLBA equal to at least 1.5 percent of adjusted total assets.
The primary purpose of the combined leverage requirement and PLBA
is to serve as a non-risk-based supplementary measure that provides a
credible backstop to the combined risk-based capital requirements and
prescribed capital conservation buffer amount (PCCBA), where the PCCBA
comprises the stability capital buffer, the stress capital buffer, and
the countercyclical capital buffer. This type of simple, transparent,
and independent measure of risk provides an important safeguard against
model risk and measurement error in the risk-based capital requirements
and acquisition strategies of the Enterprises. FHFA's rationale for the
leverage requirement and buffer is consistent with that of U.S. and
international banking regulators, although the size of each regulator's
leverage buffer varies by regulatory regime. In the U.S., large banking
organizations must maintain an enhanced supplementary leverage ratio
(eSLR) of 2 percent of total leverage exposure on top of their 3
percent supplementary leverage ratio (SLR) to avoid restrictions on
distributions and discretionary bonuses. Internationally, systemically
important banks are required to hold a leverage buffer that varies by
the bank's systemic importance.
The Enterprises are chartered to fulfill a countercyclical role in
the housing finance market. The COVID-19 pandemic, while unique and not
the basis for this proposed rule, has effectively illustrated why a
dynamic leverage buffer may be appropriate for the Enterprises. During
the pandemic, as many mortgage market participants pulled back from the
market due to capital and liquidity constraints, the Enterprises
stepped in to fulfill their countercyclical role, leading to greater
reliance on Enterprise execution for conforming mortgages. This,
combined with the Board of Governors of the Federal Reserve System's
(Federal Reserve) monthly purchases of $40 billion in Agency mortgage-
backed securities (MBS), caused the Enterprises' balance sheets to
expand considerably. As a result, the PLBA represents an increasingly
large component of the Enterprises' capital requirements and capital
buffers relative to when FHFA calibrated the PLBA in 2019. In addition,
the combined leverage requirement and PLBA exceeds the combined risk-
based capital requirement and PCCBA at some level for both Enterprises.
The leverage requirement and current PLBA are based on adjusted total
assets, which is a relatively stable measure over time. Given this
calibration, FHFA expects the current relationships between leverage
and risk-based capital at the Enterprises will continue for the
foreseeable future. When leverage capital is consistently the binding
capital constraint, it provides an incentive for an institution to
increase risk taking because taking on more risk is not reflected in
commensurately higher capital requirements, while
[[Page 53232]]
greater risk may generate greater returns. When leverage capital
sufficiently exceeds risk-based capital, high risk exposures and low
risk exposures have the same capital requirements, so an Enterprise has
an incentive to acquire higher-risk, higher-yielding mortgages, all
else equal.
As of March 31, 2021, Fannie Mae's tier 1 leverage capital
requirement plus PLBA of 4 percent was the binding capital constraint
relative to their estimated common equity tier 1 (CET1) capital
requirement plus PCCBA of 3.3 percent and their estimated tier 1 risk-
based capital requirement plus PCCBA of 3.8 percent, all relative to
adjusted total assets. Fannie Mae's estimated adjusted total capital
requirement plus PCCBA of 4.5 percent (relative to adjusted total
assets) was their only risk-based capital requirement that exceeded
their leverage capital requirement plus PLBA. At Freddie Mac, the
leverage capital requirement plus PLBA was the binding capital
constraint relative to every risk-based capital metric. Freddie Mac's
estimated CET1 capital requirement plus PCCBA of 2.8 percent, estimated
tier 1 risk-based capital requirement plus PCCBA of 3.2 percent, and
estimated adjusted total capital requirement plus PCCBA of 3.8 percent,
all relative to adjusted total assets, were each smaller than their
tier 1 leverage capital requirement plus PLBA of 4 percent.
[GRAPHIC] [TIFF OMITTED] TP27SE21.001
For the Enterprises combined, the tier 1 leverage capital
requirement plus PLBA was approximately 12 percent larger than the
combined tier 1 risk-based capital requirement plus PCCBA (relative to
adjusted total assets) as of March 31, 2021. This excess of total
leverage capital over tier 1 risk-based capital has grown from 10
percent when FHFA calibrated the ERCF near the end of 2019--a 20
percent increase in only two years. The leverage requirement and PLBA
are met with tier 1 capital, while the tier 1 risk-based capital
requirement and PCCBA are met with tier 1 capital and CET1 capital
respectively, which allows for the most direct comparison of leverage
capital to risk-based capital. In addition, CET1 capital and tier 1
capital represent the highest quality and second-highest quality forms
of capital, respectively, so examining the binding nature of the tier 1
leverage requirement relative to the tier 1 risk-based capital
requirement is prudent when considering the safety and soundness of the
Enterprises.
Rationale for Revisiting the PLBA
The primary purpose of the ERCF's leverage requirement and PLBA is
to serve as a credible backstop to the risk-based capital requirements
and risk-based capital buffers. This is consistent with the stated
purpose of the SLR and eSLR in the U.S. banking framework.\3\ FHFA is
proposing a recalibration of the PLBA because a leverage ratio that
exceeds risk-based capital requirements throughout the economic cycle
could lead to undesirable outcomes at the Enterprises, including
promoting risk-taking and creating disincentives for CRT and other
forms of risk transfer. Evolutions in the international and U.S.
banking frameworks and public comments on FHFA's 2020 re-proposed
capital rule support the proposed PLBA recalibration.
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\3\ In a June 2021 Federal Open Market Committee press
conference, the Federal Reserve Chairman stated: ``Our position has
been for a long time, and it is now, that we'd like the leverage
ratio to be a backstop to risk-based capital requirements. When
leverage requirements are binding it does skew incentives for firms
to substitute lower-risk assets for high-risk ones.'' See https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20210616.pdf.
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Financial regulators and policymakers have consistently
investigated ways to lower the quantity of leverage required for banks,
with a specific focus on the SLR and eSLR. In the U.S., banking
regulators require global systemically important banks (GSIBs) to hold
tier 1 capital in excess of 5 percent of total on-and-off balance sheet
assets (measured using total leverage exposure, which is comparable to
adjusted total assets at the Enterprises) consisting of a 3 percent
minimum SLR and a 2 percent leverage buffer (the eSLR).
Internationally, Basel III standards require systemically important
banks to hold a tier 1 capital leverage ratio buffer in excess of a 3
[[Page 53233]]
percent leverage requirement equal to 50 percent of a GSIB's higher
loss-absorbency risk-based requirements. This dynamic leverage buffer
tailors leverage requirements to business activities and risk profiles,
aiming to retain a meaningful calibration of leverage ratio standards
while not discouraging firms from participating in low-risk activities.
The higher loss-absorbency risk-based requirements is a measure similar
to the U.S. banking framework's GSIB surcharge, which varies in size
depending on a bank's systemic importance, as measured using a bank's
size, interconnectedness, cross-jurisdictional activity,
substitutability, complexity, and use of short-term wholesale funding.
In April 2018, the Federal Reserve and the Office of the Comptroller of
the Currency (OCC) released a similar proposal that would tailor the
eSLR for GSIBs by modifying the fixed 2 percent eSLR buffer to equal
one half of each firm's GSIB capital surcharge.\4\ This proposal would
have a significant impact on the leverage ratios of U.S. GSIBs,
decreasing the fixed 2 percent eSLR to, on a median basis,
approximately 1.25 percent.
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\4\ https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180411a.htm.
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In addition, there have been various proposals in recent years from
the U.S. Department of the Treasury and the U.S. Congress for a more
targeted approach to removing certain items from total leverage
exposure to address the negative externalities the SLR and eSLR
requirements may have on market liquidity and low-risk assets. One such
proposal included adjustments to the calibration of the eSLR and the
leverage exposure calculation to exclude from the denominator of total
leverage exposure cash on deposit with central banks, U.S. Treasury
securities, and initial margin for centrally cleared derivatives.\5\
The Economic Growth, Regulatory Relief, and Consumer Protection Act of
2018 \6\ adopted part of the Treasury's recommendation by relaxing the
leverage ratio for ``custodial banks'' by removing funds held at
central banks from the leverage ratio's denominator. Furthermore, as
FHFA did in the ERCF, there is precedent for bank regulators tailoring
the leverage ratio to conform to an institution's unique circumstances.
As an example, in 2015, the Federal Reserve reduced the eSLR
requirement for GE Capital from 5 percent to 4 percent when it was
designated a nonbank systemically important financial institution
(SIFI) by the Financial Stability Oversight Council (FSOC).\7\
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\5\ https://www.treasury.gov/press-center/news/Pages/Summary-of-Recommendations-for-Regulatory-Reform.aspx.
\6\ Public Law 115-174, 132 Stat. 1296 (2018).
\7\ https://www.govinfo.gov/content/pkg/FR-2015-07-24/pdf/2015-18124.pdf.
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The regulatory focus on reevaluating bank leverage ratio
requirements has sharpened further during the COVID-19 pandemic. In
March 2020, to stabilize dislocations in the market for U.S. Treasuries
as a result of the pandemic, the Federal Reserve temporarily modified
the SLR to exclude U.S. Treasury securities and central bank reserves
from the leverage calculation. In March 2021, the Federal Reserve
allowed this temporary relief to expire as the strains in the Treasury
market resulting from COVID-19 had eased, but acknowledged it ``may
need to address the current design and calibration of the SLR over time
to prevent strains from developing that could both constrain economic
growth and undermine financial stability.'' \8\ After allowing the
temporary relief to expire, the leverage ratio became the binding
capital constraint for JPMorgan Chase & Co., the largest GSIB. The
Federal Reserve also stated that ``to ensure that the SLR--which was
established in 2014 as an additional capital requirement--remains
effective in an environment of higher reserves, the Board will soon be
inviting public comment on several potential SLR modifications.'' \9\
Further, members of the Federal Reserve's Board of Governors recently
confirmed that the Board is looking to make changes to the leverage
framework.\10\
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\8\ https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210319a.htm.
\9\ Id.
\10\ In May 2021, the Board's Vice Chair for Supervision
testified to the U.S. House Financial Services Committee: ``Among
other measures, we are reviewing the design and calibration of the
supplementary leverage ratio. . .''. See https://www.federalreserve.gov/newsevents/testimony/quarles20210519a.htm.
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The current circumstances in which tier 1 leverage capital
requirements are binding for both Fannie Mae and Freddie Mac may lead
to perverse incentives that have the Enterprises take on more risk than
is prudent. By treating all risk similarly, a binding leverage ratio
driven by the PLBA may incentivize risk-taking because the capital
requirement would be the same for high-risk and low-risk loans. In
addition, the Enterprises would have no capital incentive to transfer
risk to achieve a risk-based capital requirement lower than their
leverage requirement. However, when risk-based capital requirements are
higher than leverage capital requirements, CRT represents a viable way
to both lower risk at the Enterprises and to shrink the gap between
capital requirements and available capital, promoting safety and
soundness. These were pressing issues to commenters when FHFA re-
proposed its Enterprise capital rule in 2020.
Prior to finalizing the ERCF, FHFA received a significant number of
public comments on FHFA's proposed PLBA. Some commenters recommended a
leverage buffer smaller than was proposed (both with and without
corresponding recommendations for the leverage requirement). Most
commenters focused on the size of the combined leverage requirement and
PLBA as a single 4 percent leverage ratio. Most of those commenters
recommended a combined leverage ratio smaller than 4 percent. Some
suggested that 4 percent overstates potential risk in the Enterprises'
books because FHFA's ERCF calibration was based on historical losses
without adjusting for prevailing portfolio composition. That is, given
that the Enterprises are no longer permitted to acquire many of the
loans that precipitated the 2008 financial crisis, such as Alt-A loans
and option ARMs, a leverage ratio corresponding to the Enterprises'
current acquisition profile should not be calibrated to losses
involving such loans. Relatedly, commenters suggested that concerns the
Enterprises may again loosen underwriting standards have been addressed
in several ways, including through post-crisis statutory and regulatory
changes such as the Qualified Mortgage and Ability-to-Repay rule, which
would require a statutory change and/or a notice of proposed rulemaking
followed by a period of public comment in order to modify. In addition,
commenters argued that these concerns were further addressed through
post-crisis improvements in risk management and improved loss-
mitigation capabilities, incorporation of automated tools into the
underwriting process to verify the accuracy of data and detect loan
manufacturing defects, tightened counterparty risk management, and
improvements in fraud prevention.
Commenters also suggested that the Enterprises' recent Dodd-Frank
Act Stress Tests (DFAST) results do not support a 4 percent leverage
ratio. Commenters' analysis at the time indicated that 4 percent
leverage would be between four and thirteen times DFAST losses,
depending on which scenario was being compared. Commenters suggested
this multiple was excessive. In addition, some commenters viewed the
PLBA as being duplicative of other ERCF adjustments and buffers that
also were designed to mitigate model and related risk. Finally,
[[Page 53234]]
as stated above, many commenters stated that a binding leverage ratio
would be a disincentive for CRT and encourage the Enterprises to take
on more risk.
B. CRT
Background
The Enterprises' core businesses reflect the acquisition of
mortgages from financial institutions and the bundling of those
mortgages into collateral for MBS. The Enterprises sell to investors
part of the cash flows that stem from the mortgages underlying the MBS.
The Enterprises guarantee the principal and interest payments to
investors and collect a guarantee fee from their sellers.
Mortgage exposures typically carry both interest rate and credit
risk. In general, the Enterprises transfer mortgage interest rate risk
and retain and manage mortgage credit risk. The interest rate risk on
securitized mortgages is transferred to investors through MBS sales.
The Enterprises' principal and interest guarantee helps to create a
liquid and efficient MBS market. It also limits the credit risk assumed
by MBS investors, except for an investor's counterparty exposure to the
Enterprises. Credit risk can be broadly separated into expected losses
and unexpected losses, as determined by a credit model. The Enterprises
rely on guarantee fees to cover expected losses and, absent CRT, equity
capital to cover unexpected losses.
In its role as conservator, FHFA established a goal of reducing
taxpayer risk exposure to the credit guarantees extended by the
Enterprises. To accomplish this objective, FHFA used its
conservatorship strategic plans and scorecards to encourage the
Enterprises to transfer credit risk to the private sector. In 2012,
FHFA's Strategic Plan for Enterprise Conservatorships proposed the use
of loss sharing agreements to reduce the credit risk incurred by the
Enterprises. The 2013 Conservatorship Scorecard required each
Enterprise to ``demonstrate the viability of multiple types of [credit]
risk transfer transactions'' on single-family loans. The Enterprises
first implemented their CRT programs that same year and have since
transferred to private investors a substantial amount of the credit
risk of new acquisitions the Enterprises assume for loans in targeted
loan categories. The programs have become a core part of the
Enterprises' single-family credit guarantee business and include or
have included CRTs via capital markets issuances (both corporate debt
and bankruptcy remote trust structures), insurance/reinsurance
transactions, senior/subordinate transactions, and a variety of lender
collateralized recourse transactions.
The 2014 Strategic Plan for the Conservatorships of Fannie Mae and
Freddie Mac emphasized the desirability of greater use of CRT in the
future. Additionally, the 2014 and 2015 Conservatorship Scorecards set
more ambitious CRT performance goals for each Enterprise. Since that
time, the Conservatorship Scorecards have included various goals to
ensure the continued use of CRT as a means of reducing risk exposure to
taxpayers. For example, the 2016 through 2019 Conservatorship
Scorecards established an objective for the Enterprises to transfer a
meaningful portion of credit risk on at least 90 percent of the unpaid
principal balance (UPB) of their acquired single-family mortgage loans
targeted for credit risk transfer. Targeted loans include fixed-rate,
non-HARP loans with terms over 20 years and loan-to-value (LTV) ratios
above 60 percent. Such loans represent a substantial amount of the
credit risk associated with all new loan acquisitions.
From the beginning of the Enterprises' single-family CRT programs
in 2013 through the end of 2020, Fannie Mae and Freddie Mac have
transferred a portion of credit risk on approximately $4.1 trillion of
UPB, with a combined risk-in-force (RIF) of about $137 billion, or 3.3
percent of UPB.\11\
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\11\ Credit Risk Transfer Progress Report 4Q20, https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/CRT-Progress-Report-4Q20.pdf.
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The Enterprises' CRT programs have evolved over time in response to
changing macroeconomic conditions, loan acquisition risk profiles, and
views of expected and unexpected losses. However, across the different
types of CRT vehicles, the basic transaction is the same: An Enterprise
pays private market participants to assume credit risk in a severe
stress scenario on mortgages the Enterprise guarantees, where the
severe stress scenario is generally comparable to the 2008 global
financial crisis. Further, to ensure alignment of interests with
investors, the Enterprises retain at least 5 percent of the risk
exposure sold in their CRT transactions. This is referred to as
vertical risk retention.
The Enterprises have developed their various CRT products in order
to meet certain program goals established by FHFA in 2012. Among these
goals is that CRT transactions should be economically sensible,
repeatable, scalable, and structured to not disrupt the efficient
operation of the ``To Be Announced'' (TBA) market (which provides the
market with benefits including allowing borrowers to lock in rates in
advance of closing). The widespread use of TBA trading has contributed
significantly to the liquidity and efficiency of the secondary market
for single-class MBS. A misconception is that ``economically sensible''
implies low-cost on an absolute basis. However, the costs of CRT should
be evaluated relative to the cost of equity capital needed to self-
insure the risk. To be economically sensible, an Enterprise should
consider executing CRT transactions when the cost to the Enterprise for
transferring the credit risk does not meaningfully exceed the cost to
the Enterprise of self-insuring the credit risk being transferred.
Market conditions in addition to a transaction's cost and structure
ultimately determine a CRT's relative profitability, but if CRT premium
payments are low relative to the capital reduction provided by the CRT,
then the Enterprise has the opportunity to execute economically
sensible CRT transactions, and CRT may provide taxpayer protection at a
lower cost than equity capital.
A further goal was to develop different types of products to
provide for the broadest possible access to investors with the
expectation that at least some of those investors would remain in the
market through all phases of a housing price cycle. Since the inception
of the programs in 2013, the types of single-family CRT transactions
have included structured capital markets issuances known as Structured
Agency Credit Risk (STACR) for Freddie Mac and Connecticut Avenue
Securities (CAS) for Fannie Mae, insurance/reinsurance transactions
known as Agency Credit Insurance Structure (ACIS) for Freddie Mac and
Credit Insurance Risk Transfer (CIRT) for Fannie Mae, front-end lender
risk sharing transactions, and senior/subordinate transactions.
Most of the RIF has come from capital markets issuances (STACR and
CAS). These securities were initially issued as direct debt obligations
of each Enterprise; however, in 2018, both Enterprises transitioned
their capital markets CRT issuances to a Trust structure with the notes
being issued by a bankruptcy remote trust created for each individual
CAS or STACR transaction. The proceeds from the sale of the notes are
deposited into the bankruptcy remote trust and there is no direct
counterparty exposure to the Enterprises for investors. By implementing
the Trust structure, the Enterprises are now able to benefit from
insurance accounting treatment for their capital markets CRT
transactions.
[[Page 53235]]
Insurance accounting treatment aligns the timing of the recognition of
credit losses with CRT loss recoveries. Under the previous corporate
debt structure, there was a significant timing mismatch between the
recognition of losses and recoveries as the CRT benefit could not be
recognized until the underlying delinquent mortgage loan had progressed
through the often-lengthy disposition process.
In addition, both Fannie Mae and Freddie Mac now engage in CRT
offerings under which the securities are issued by a third-party
bankruptcy-remote trust that also qualifies as a Real Estate Mortgage
Investment Conduit (REMIC). The transition of the capital markets CRT
programs to the REMIC Trust structure was a collaborative, long-term
effort between Fannie Mae, Freddie Mac, and FHFA. The REMIC Trust
structure, like the trust structure described above, eliminates
accounting mismatches associated with prior direct debt issuance
transactions and limits investor exposure to Enterprise counterparty
risk. Additionally, the REMIC structure is often more attractive to
domestic Real Estate Investment Trusts (REITs) and foreign investors.
After exceptionally strong issuance volume between 2013 and the
first quarter of 2020, neither Enterprise entered into new CRT
transactions in the second quarter of 2020 due to the adverse market
conditions stemming from the COVID-19 pandemic. However, Freddie Mac
returned to the CRT capital markets and insurance/reinsurance market
during the third quarter of 2020, executing nine transactions in the
second half of the year. In contrast, and despite improved market
conditions, Fannie Mae continued to pause issuance of new CRT
transactions to evaluate the costs and benefits of CRT, including the
capital relief provided by the transactions and the market conditions,
as well as their overall capital requirements, risk appetite, and
business plan.\12\ Overall, while down from its peak in 2019, total CRT
volume in 2020 remained strong and exceeded 2018 volume despite the
extreme and unforeseen difficulties arising from the COVID-19 pandemic.
In 2021, both Enterprises are considering potential changes to their
CRT programs to optimize risk transfer and capital relief under the
ERCF.
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\12\ https://www.fanniemae.com/media/40576/display.
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Multifamily CRT
Even before the formalization of the single-family CRT programs,
risk transfer to the private sector had long been an integral part of
the multifamily business models at the Enterprises. Freddie Mac has
traditionally focused on senior/subordinate structures via capital
market transactions largely through its K-Deal platform. Fannie Mae has
traditionally focused on pro-rata risk sharing directly with lenders
through its Delegated Underwriting and Servicing (DUS) program. As the
single-family CRT programs evolved and grew, the Enterprises worked to
expand their existing multifamily risk transfer models to include
structures similar to those of the single-family businesses.
Fannie Mae issued its first multifamily reinsurance transaction in
2016, the Multifamily Credit Insurance Risk Transfer (MCIRT), which was
based on the framework of the existing single-family reinsurance (CIRT)
transactions, where the Enterprise purchases insurance coverage
underwritten by a group of insurers/reinsurers. Fannie Mae uses MCIRT
to transfer credit risk on multifamily loan acquisitions with up to $30
million in UPB. Since the first transaction in 2016, Fannie Mae's MCIRT
has become programmatic with a total of eight transactions executed.
These transactions provide combined RIF of $1.9 billion on a total of
$81 billion (as measured at time of deal inception) of Fannie Mae's
multifamily loan acquisitions.
In 2018, Freddie Mac introduced its Multifamily Credit Insurance
Pool (MCIP) program to transfer additional credit risk on its
multifamily loan acquisitions to the reinsurance market. In the MCIP
structure, as in Fannie Mae's MCIRT program, Freddie Mac purchases
insurance coverage underwritten by a group of insurers/reinsurers that
generally provide first loss and/or mezzanine loss credit protection.
These transactions are also similar in structure to the single-family
ACIS transactions.
In 2019, Fannie Mae expanded its multifamily CRT program by
executing its first Multifamily Connecticut Avenue Securities (MCAS)
CRT transaction which is based on the framework for Fannie Mae's
existing single-family CAS execution. Fannie Mae uses MCAS to transfer
credit risk on multifamily loans with UPBs greater than $30 million.
However, this new product allowed Fannie Mae to reach a multifamily CRT
investor base outside of the reinsurance industry. Fannie Mae has
executed a total of two MCAS transactions which provide combined RIF of
$0.9 billion on a total of $29 billion (as measured at time of deal
inception) of Fannie Mae's multifamily loan acquisitions.
Freddie Mac's multifamily capital markets CRT program began with
the issuance of three fixed-rate Multifamily Structured Credit Risk
(MSCR) notes in 2016 and 2017 (as a separate offering from the K-deal
program). These legacy MSCR notes use a fixed severity structure like
early single-family CRTs and are unsecured and unguaranteed corporate
debt obligations that transfer to third parties a portion of the credit
risk of the multifamily loans underlying certain consolidated other
securitizations and other mortgage-related guarantees. SCR Notes are
synthetic instruments whose cash flows are driven by the performance of
a pool of multifamily reference obligations, instead of actual
collateral tied to a trust in a typical securitization such as K-Deals.
In 2021, Freddie Mac's MSCR program transitioned to an actual loss/
Trust structure, and coupon payments are now floating rate, indexed to
the Secured Overnight Financing Rate (SOFR). These features align with
the current single-family STACR CRT product.
CRT in the ERCF
The Enterprises manage mortgage credit risk through their
underwriting systems, guarantee fee revenues, and CRT programs. The
ERCF reflects the Enterprises' management of mortgage credit risk by
allowing the Enterprises to reduce their credit risk-weighted assets
for eligible CRT. However, the ERCF's treatment of CRT includes various
components that limit the amount of capital relief provided by CRTs to
ensure that all exposures retained by an Enterprise are meaningfully
capitalized. Dollar-for-dollar capital relief should not be expected
given that CRT transactions introduce counterparty and structural risk,
and CRT has not yet been tested through a full economic cycle.
Under the ERCF, an Enterprise determines the capital treatment for
eligible CRT by assigning risk weights to retained CRT exposures. The
rule includes: (i) Operational criteria to mitigate the risk that the
terms or structure of the CRT would not be effective in transferring
credit risk; (ii) a tranche-specific prudential risk weight floor of 10
percent; and (iii) adjustments to reflect loss sharing effectiveness,
loss-timing effectiveness, and a dynamic overall effectiveness
adjustment meant to capture the differences between CRT and regulatory
capital.
The operational criteria, risk weight floor, and effectiveness
adjustments limit capital relief from CRT. The operational criteria act
as a gateway by setting minimum criteria for potential
[[Page 53236]]
CRT credit risk capital relief. The 10 percent risk weight floor adds
minimum capital requirements to all retained CRT exposures, no matter
how remote the credit risk. The effectiveness adjustments reduce the
risk-weighted assets of transferred CRT tranches, thereby reducing the
capital relief afforded by the CRT. Of these three elements included in
the ERCF's CRT treatment, the risk weight floor drives the majority of
the reduction in credit risk capital relief due to the relative size of
the low-risk CRT exposures the Enterprises generally retain. For
example, the stylized CRT transaction in FHFA's 2020 re-proposed
capital rule showed capital relief of 38 percent due to the CRT.\13\
However, absent the risk weight floor on retained exposures, capital
relief would have been approximately 66 percent.
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\13\ 85 FR at 39335 (June 30, 2020).
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Rationale for Revisiting the ERCF's CRT Treatment
CRT is an effective mechanism for distributing credit risk across a
broad mix of investors and has become an integral part of the
Enterprises' business models. FHFA is proposing amendments to the ERCF
that would revise the CRT securitization framework for several reasons.
First, if an Enterprise retained every tranche of a CRT, its post-
CRT credit risk capital requirement for the CRT exposures would be
higher than its pre-CRT credit risk capital requirements for the
underlying mortgage exposures due to the structural and modeling risk
of the CRT itself. The capital relief afforded by the ERCF CRT
securitization framework more than offsets this so-called
securitization penalty, but within the securitization framework,
potential capital relief is limited by adjustments that reflect various
ways a CRT might be less than fully effective at transferring risk.
Increasing the capital relief for CRT by reducing these effectiveness
adjustments could improve the safety and soundness of each Enterprise
by encouraging the transfer of risk so that each Enterprise can fulfill
its statutory mission to provide stability and ongoing assistance to
the secondary mortgage market across the economic cycle.
Second, FHFA believes that part of the process to responsibly end
the conservatorships of the Enterprises includes the transfer of a
portion of the Enterprises' credit risk to private markets. Such
activity allows the Enterprises to maintain their core businesses,
fulfill their statutory missions, and grow organically while
simultaneously shedding risk that could otherwise prevent them from
accomplishing these goals. It is possible that in the absence of risk
transfer, required capital may increase faster than retained earnings
and the Enterprises may therefore grow farther from achieving capital
adequacy and exiting their conservatorships. To the extent that the
earnings expenses of CRT are smaller than the capital relief provided
by CRT, executing CRT would help alleviate this issue.
Third, a revised risk-based capital treatment for CRT could
facilitate regulatory capital planning in furtherance of the safety and
soundness of the Enterprises and their countercyclical mission. The
Enterprises' CRT programs, which FHFA has in the past required to cover
90 percent of the UPB of target loans (generally those with an LTV
greater than 60 percent and a loan term greater than 20 years), help
facilitate the continued acquisition of higher risk loans throughout
the economic cycle due to capital relief afforded to risk transfer. In
addition, as adopted, the ERCF's CRT framework does little to
complement the single-family countercyclical adjustment. Revised CRT
incentives could, for example, help to align the issuance of CRT with
changes in the countercyclical adjustment.
Fourth, prior to finalizing the ERCF, FHFA received a significant
number of comments on FHFA's proposed approach to CRT. Many commenters
expressed the view that CRT is an effective means by which to transfer
risk to private markets, protect taxpayers, and stabilize the
Enterprises and the housing finance market more generally.
Consequently, most of these commenters suggested that the proposed
treatment of CRTs was too punitive and would imprudently discourage
CRTs. Many commenters criticized the 10 percent risk weight floor and
the overall effectiveness adjustment, arguing that FHFA's proposed
policy choices would unduly decrease the capital relief provided by CRT
and reduce the Enterprises' incentives to engage in CRT. FHFA
nevertheless adopted the risk weight floor as proposed, citing a belief
that 10 percent represents an appropriate capitalization for the credit
risk in these retained risks and a favorable comparison to the U.S.
bank regulatory framework. To account for the fact that CRT does not
provide the same loss-absorbing capacity as equity financing and to
reduce the extent to which the proposed 10 percent adjustment may lead
to more regulatory capital than is necessary to ensure safety and
soundness, FHFA adopted a modified overall effectiveness adjustment
that starts at 10 percent and decreases with an exposure's credit risk.
FHFA also received comments on the interaction of CRTs and the
leverage ratio requirement. Several commenters expressed concern about
the potential adverse impact of a binding leverage requirement on CRTs.
Specifically, commenters indicated that a binding leverage requirement
would provide no incentive for the Enterprises to lower their risk-
based capital requirements and therefore would disincentivize CRTs,
which could lead the Enterprises to reduce or halt their CRT programs
and increase the risks held in portfolio.
III. Proposed Requirements
A. PLBA
The proposed rule would amend the ERCF by replacing the fixed PLBA
equal to 1.5 percent of an Enterprise's adjusted total assets with a
dynamic PLBA equal to 50 percent of the Enterprise's stability capital
buffer as calculated in accordance with 12 CFR 1240.400.
The Enterprise-specific stability capital buffer was designed to
mitigate risk to national housing finance markets by requiring a larger
Enterprise to maintain a larger cushion of high-quality capital to
reduce the likelihood of a large Enterprise's failure and preclude the
potential impact a failure would have on the national housing finance
markets. Such a buffer creates incentives for each Enterprise to reduce
its housing finance market stability risk by curbing its market share
and growth in ordinary times, preserving room for a larger role during
a period of financial stress, and may offset the funding advantage that
an Enterprise might have on account of being perceived as ``too big to
fail.'' The stability capital buffer is based on a market share
approach, where each Enterprise's stability capital buffer is directly
related to its relative share of total residential mortgage debt
outstanding that exceeds a threshold of 5 percent market share. The
stability capital buffer, expressed as a percent of adjusted total
assets, increases by 5 basis points for each percentage point of market
share exceeding that threshold.
The proposed rule would replace the fixed 1.5 percent PLBA with a
dynamic leverage buffer determined annually and tied to the stability
capital buffer. The stability capital buffer is an effective proxy for
the U.S. banking framework's GSIB capital surcharge and the Basel
higher loss-absorbency risk-based requirement as it is designed to
address the predominant threat an Enterprise poses to national housing
markets--its
[[Page 53237]]
size. Thus, in a manner similar to the U.S. banking regulators'
proposal to set the eSLR buffer to one-half of the GSIB surcharge, an
Enterprise's PLBA would equal one-half of its stability capital buffer
under the proposed rule. Under the amended rule, as shown in the figure
below and as of March 31, 2021, Fannie Mae's PLBA would decrease from
approximately $62 billion, or 1.5 percent of the prior quarter's
adjusted total assets, to approximately $23 billion, or 0.53 percent of
adjusted total assets.\14\ Freddie Mac's PLBA would similarly decrease
from $46 billion, or 1.5 percent of the prior quarter's adjusted total
assets, to approximately $11 billion, or 0.35 percent of adjusted total
assets.\15\
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\14\ The stability capital buffer is calculated using adjusted
total assets as of the most recent December 31, unless adjusted
total assets at that time is greater than adjusted total assets as
of the prior December 31, in which case the calculation would use
adjusted total assets from the prior December 31.
\15\ Id.
[GRAPHIC] [TIFF OMITTED] TP27SE21.002
There are several benefits of the proposed approach. First,
decreasing the PLBA to the point where risk-based capital is the
binding capital constraint at the Enterprises would promote safety and
soundness by lessening the likelihood that an Enterprise has an
incentive to take on more risk in a capital optimization strategy.
Setting the PLBA to 50 percent of the stability capital buffer would
not guarantee that leverage capital is never binding, but it would
restore leverage capital to a position of a credible backstop rather
than the binding capital constraint for the foreseeable future. This
would allow the other aspects of the ERCF, namely the risk-based
capital requirements, including the single-family countercyclical
adjustment, to work as intended. For example, the single-family
countercyclical adjustment works by increasing risk-based capital
requirements to largely offset capital benefits driven by house price
appreciation. This effective tool alleviates concerns that risk-based
capital will artificially decline with increasing property values,
thereby lessening the need for a consistently binding leverage capital
framework. An unduly high leverage requirement dampens the
functionality of the single-family countercyclical adjustment.
The ERCF does not currently contain an exposure-level method to
mitigate the pro-cyclicality of the credit risk capital requirements
for multifamily mortgage exposures. FHFA has, in two notices of
proposed rulemaking, indicated it would like to implement such an
adjustment, and has twice sought recommendations for potential
approaches. Although FHFA has received numerous suggestions for a
multifamily countercyclical adjustment, most have relied on proprietary
data or indices to some extent. FHFA is again expressing its desire to
include a multifamily countercyclical adjustment in the ERCF that is
not reliant on proprietary information and is seeking input on how that
adjustment should be constructed.
Question 1: What approach that relies only on non-proprietary data
or indices should FHFA consider to mitigate the pro-cyclicality of the
credit risk capital requirements for multifamily mortgage exposures?
Second, the proposed rule's PLBA will encourage the Enterprises to
transfer risk rather than to buy and hold risk. Leverage capital
requirements and buffers treat each dollar of exposure equally and
incentivize risk-taking to the point where risk-based capital equals
leverage capital. At the Enterprises, seasoned portfolios generally
require less capital than new acquisitions because risk determinants
such as the loan-to-value ratio typically
[[Page 53238]]
improve as mortgage loans age. Therefore, higher leverage requirements
incentivize an Enterprise to acquire riskier, higher-yielding exposures
and then to hold that risk so that risk-based capital on the book
approximates leverage capital on the book. A lower PLBA directly
encourages a risk transfer strategy by lowering the long-run risk-based
capital target for an Enterprise's book. Buying and holding risky
assets would likely no longer be optimal from a capital perspective if
the risk-based capital on an Enterprise's seasoned portfolio exceeded
leverage capital.
Third, a leverage framework with a dynamic PLBA that grows and
shrinks as an Enterprise grows and shrinks, respectively, would
function as a better backstop to a risk-based capital framework that
includes a systemic risk component such as the stability capital
buffer. In the 2020 ERCF notice of proposed rulemaking, FHFA argued
that a larger Enterprise's default would pose a greater threat to the
national housing finance markets than a smaller Enterprise's default.
As a result, a probability of default that might be acceptable for a
smaller Enterprise could be unacceptably high for a larger Enterprise,
necessitating the need for an Enterprise-specific stability capital
buffer based on size. For similar reasons, a smaller leverage buffer
may not be appropriate for a larger institution, and a larger leverage
buffer may not be appropriate for a smaller institution. Therefore, a
leverage buffer that adjusts with the stability capital buffer would
help resolve this type of inconsistency and allow the leverage capital
framework to better serve as a credible backstop to the risk-based
capital framework.
Fourth, a dynamic PLBA that is tied to the stability capital buffer
would further align the ERCF with Basel III standards. Internationally,
GSIBs are required to hold a leverage buffer equal to 50 percent of
their higher loss-absorbency risk-based requirements--a measure akin to
the GSIB surcharge in the U.S. banking framework. FHFA believes that
tailoring an Enterprise's leverage ratio to its business activities and
risk profile, to the extent that these characteristics are related to
an Enterprise's share of the residential mortgage market, will allow
for leverage to remain a credible backstop to risk-based capital
without discouraging the Enterprise from participating in low-risk
activities.
Question 2: Is the proposed PLBA appropriately formulated? What
adjustments, if any, would you recommend?
Question 3: Is the PLBA necessary for the ERCF's leverage framework
to be considered a credible backstop to the risk-based capital
requirements and PCCBA?
Question 4: In light of the proposed changes to the PLBA and the
CRT securitization framework, is the prudential risk weight floor of 20
percent on single-family and multifamily mortgage exposures
appropriately calibrated? What adjustments, if any, would you
recommend?
B. CRT
CRT Risk Weight Floor
The proposed rule would replace the prudential floor of 10 percent
on the risk weight assigned to any retained CRT exposure with a
prudential floor of 5 percent on the risk weight assigned to any
retained CRT exposure.
The prudential risk weight floor plays an important role in the
ERCF securitization framework. The risk weight floor is designed to
mitigate certain risks and limitations associated with underlying
historical data and models, including that crisis-era losses at the
Enterprises were mitigated by federal government support that may not
be repeated during the next crisis and that potential material risks
are not assigned a risk-based capital requirement. In addition, banking
agencies believe requiring more capital on a transaction-wide basis
than would be required if the underlying assets had not been
securitized is important in reducing the likelihood of regulatory
capital arbitrage through securitizations.\16\ CRT may pose similar
structural risks that merit a departure from capital neutrality.
Therefore, the ERCF's risk weight floor helps mitigate the model risk
associated with the calibration of the credit risk capital requirements
of the underlying exposures and the model risk posed by the calibration
of the adjustments for loss-timing and counterparty risks.
---------------------------------------------------------------------------
\16\ See Regulatory Capital Rules: Regulatory Capital,
Implementation of Basel III, Capital Adequacy, Transition
Provisions, Prompt Corrective Action, Standardized Approach for
Risk-weighted Assets, Market Discipline and Disclosure Requirements,
Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital
Rule, 78 FR 62018, 62119 (Oct. 11, 2013).
---------------------------------------------------------------------------
In sizing the 10 percent prudential risk weight floor, FHFA sought
to promote consistency with the U.S. banking framework and strike an
appropriate balance between permitting CRT while also mitigating the
safety and soundness, mission, and housing stability risk that might be
posed by some CRT. FHFA continues to believe that an Enterprise retains
credit risk to the extent it retains CRT exposures and that such risk
should be appropriately capitalized. There is the risk that the
structuring of some CRT is driven by regulatory arbitrage, with an
Enterprise focused on CRT structures that obtain capital relief that is
disproportionate to the modeled credit risk actually transferred. There
is also the risk that a CRT will not perform as expected in
transferring credit risk to third parties, perhaps because a court will
not enforce the contractual terms of the CRT structure as expected.
Because CRT tranches, even senior CRT tranches, are not risk-free, each
Enterprise should maintain regulatory capital to absorb losses on those
retained CRT exposures. However, FHFA believes that the current CRT
risk weight floor may not achieve the proper balance between permitting
CRT and safety and soundness.
As currently calibrated, the 10 percent floor on the risk weight
assigned to a retained CRT exposure unduly decreases the capital relief
provided by CRT and reduces an Enterprise's incentives to engage in
CRT. This occurs in part because the aggregate credit risk capital
required for a retained CRT exposure is often greater than the
aggregate credit risk capital required for the underlying exposures,
especially when the credit risk capital requirements on the underlying
whole loans and guarantees are low or the CRT is seasoned. Decreasing
the CRT risk weight floor to 5 percent would directly lessen this
disincentive while still ensuring that all retained exposures are
treated as being not risk-free.
In addition, the 10 percent risk weight floor discourages CRT
through its duplicative nature. Per the ERCF's operational criteria for
CRT, FHFA must approve each transaction as being effective in
transferring the credit risk of one or more mortgage exposures to
another party, taking into account any counterparty, recourse, or other
risk to the Enterprise and any capital, liquidity, or other
requirements applicable to counterparties.\17\ This regulatory approval
process mitigates the safety and soundness risk posed by CRT structures
and contractual terms, lessening the need for a tranche level risk
weight floor as high as 10 percent. Moreover, the Enterprises are able
to further lessen the need for a punitive CRT risk weight floor with
their ability to mitigate unknown risks through their underwriting
standards and servicing and loss mitigation programs. The standards and
programs are flexible,
[[Page 53239]]
rigorous, and constantly evolving, helping minimize losses through the
entire life cycle of a mortgage loan.
---------------------------------------------------------------------------
\17\ 12 CFR 1240.41(c)(2).
---------------------------------------------------------------------------
FHFA continues to believe that CRT can play an important role in
ensuring that each Enterprise operates in a safe and sound manner and
is positioned to fulfill its statutory mission across the economic
cycle. FHFA also continues to believe that an Enterprise does retain
some credit risk on its CRT and that the risk should be appropriately
capitalized. FHFA believes that a 5 percent CRT risk weight floor will
enhance the safety and soundness of the Enterprises by increasing the
incentives to undertake risk transfer activities while continuing to
capitalize retained CRT tranches against structure, model, unforeseen,
and other risks. Furthermore, lowering the tranche level risk weight
floor should reduce the extent to which the CRT effectiveness
adjustments may require more regulatory capital for retained CRT
exposures than is necessary to ensure safety and soundness, and help
ensure that FHFA does not unduly discourage CRT on mortgage exposures
with risk profiles similar to those of recent acquisitions by the
Enterprises.
Question 5: Is the 5 percent prudential floor on the risk weight
for a retained CRT exposure appropriately calibrated? What adjustment,
if any, would you recommend?
Overall Effectiveness Adjustment
The proposed rule would remove the requirement that an Enterprise
must apply an overall effectiveness adjustment to its retained CRT
exposures in accordance with the ERCF's securitization framework in 12
CFR 1240.44(f) and (i).
FHFA included an overall effectiveness adjustment in the CRT
securitization framework largely in response to comments received on
FHFA's 2018 notice of proposed rulemaking on Enterprise capital.
Commenters argued that CRT has less loss-absorbing capacity than an
equivalent amount of equity financing due to the upfront and ongoing
costs of CRT, and that while CRT coverage is only on a specified pool,
equity financing can cross-cover risks throughout the balance sheet.
However, commenters on the 2020 ERCF notice of proposed rulemaking
argued that while these considerations are reasonable, in the context
of the totality of the proposed CRT framework and a credible leverage
ratio requirement as a backstop, the overall effectiveness adjustment
is not needed and creates unnecessary disincentives for the Enterprises
to engage in CRT. In addition, commenters stated that the CRT tranche
risk weight floor covers the risk that a CRT will not perform as
expected in transferring credit risk to third parties, which is similar
to the risk that the overall effectiveness adjustment was designed to
cover.
Unlike the counterparty and loss-timing effectiveness adjustments
in the CRT securitization framework, the overall effectiveness
adjustment does not target specific risks. For this reason, and given
the opinions of commenters on the overall effectiveness adjustment,
FHFA has determined that it is an appropriate place to make a
refinement within the CRT securitization framework to further promote
the use of CRT without increasing safety and soundness risks at the
Enterprises. FHFA is proposing to remove the adjustment rather than to
reduce it due to the lack of empirical evidence suggesting that a lower
overall effectiveness adjustment is less duplicative than the
adjustment in the ERCF final rule published on December 17, 2020.
Question 6: Is the removal of the overall effectiveness adjustment
within the CRT securitization framework appropriate in light of the
proposed rule's 5 percent prudential floor on the risk weight for
retained CRT exposures?
Adjustments to CRT Capital Relief
The two proposed CRT modifications would increase the capital
relief afforded an Enterprise for well-structured CRT on many common
mortgage exposures, increasing incentives for the Enterprises to engage
in CRT. For existing CRT, the two changes would increase capital relief
compared to the current ERCF; however, the changes may not impact
future CRT in exactly the same way. Each Enterprise has designed its
existing CRT structures with attachment and detachment points,
collateralization, and other terms based on the current ERCF and
previous guidance. Each Enterprise will likely be able to structure the
tranches and other aspects of its future CRT somewhat differently,
taking into account modifications in any finalized rule amendments.
Nonetheless, FHFA believes that the proposed rule's modifications would
reduce the extent to which the CRT methodology may require more
regulatory capital for retained CRT exposures than is necessary to
ensure safety and soundness. FHFA also believes that these
modifications would provide each Enterprise a mechanism for flexible
and substantial capital relief through CRT, and CRT likely will remain
a valuable tool for managing credit risk and that each Enterprise will
base its CRT decisions on its own risk management assessments, not
solely on the regulatory risk-based capital requirements.
The proposed rule would implement a modified ERCF CRT framework
through which an Enterprise determines its credit risk-weighted assets
for any eligible retained CRT exposures and any other credit risk that
might be retained on its CRT. Under the proposed rule, an Enterprise
would calculate credit risk-weighted assets for retained credit risk in
a CRT using risk weights and exposure amounts for each CRT tranche. The
exposure amounts of the retained CRT exposures for each tranche would
be increased by adjustments to reflect counterparty credit risk and the
length of CRT coverage (i.e., remaining time until maturity). Unlike
the current ERCF, the proposed framework would not include an overall
effectiveness adjustment. Further, the proposed rule would also set a
credit risk capital requirement floor for retained risk through a
tranche-level risk weight floor of 5 percent rather than 10 percent.
The two proposed modifications to the CRT securitization framework
could lead to a significant increase in capital relief. For Fannie Mae
and Freddie Mac combined, capital relief from single-family CRT would
increase by an estimated 45 percent, while capital relief from
multifamily CRT would increase by an estimated 33 percent. Together,
aggregate capital relief on the Enterprises' books of business would
increase by an estimated 40 percent, where the increase is driven
primarily by the change to the CRT tranche risk weight floor as
evidenced by the example below. These modifications could help to
ensure that the rule does not create undue disincentives to utilize
CRTs.
Question 7: Is the proposed approach to determining the credit risk
capital requirement for retained CRT exposures appropriately
formulated? What adjustments, if any, would you recommend?
Question 8: Will the proposed amendments to the CRT securitization
framework provide the Enterprises with sufficient incentives to engage
in more CRT transactions without compromising safety and soundness?
CRT Example
To provide clarity on how the proposed modifications would alter
the CRT risk weight calculations, we provide an example using the same
stylized CRT that was used as an example in the ERCF notice of proposed
[[Page 53240]]
rulemaking. Consider the following inputs from an illustrative CRT:
$1,000 million in unpaid principal balance of performing
30-year fixed rate single-family mortgage exposures with original loan-
to-values (OLTVs) greater than 60 percent and less than or equal to 80
percent;
CRT coverage term of 10 years;
Three tranches--B, M1, and AH--where tranche B attaches at
0% and detaches at 0.5%, tranche M1 attaches at 0.5% and detaches at
4.5%, and tranche AH attaches at 4.5% and detaches at 100%;
Tranches B and AH are retained by the Enterprise, and
ownership of tranche M1 is split between capital markets (60 percent),
a reinsurer (35 percent), and the Enterprise (5 percent);
The aggregate credit risk-weighted assets on the single-
family mortgage exposures underlying the CRT are $343.8 million;
Aggregate expected losses on the single-family mortgage
exposures underlying the CRT of $2.5 million; and
The reinsurer posts $2.8 million in collateral, has a
counterparty financial strength rating of 3, and does not have a high
level of mortgage concentration risk.
[GRAPHIC] [TIFF OMITTED] TP27SE21.003
The Enterprises would first calculate risk weights for each tranche
assuming full effectiveness of the CRT in transferring credit risk on
the underlying mortgage exposures. In general, tranche risk weights are
the highest for the riskiest, most junior tranches (such as tranche B),
and lower for the more senior tranches (such as tranches M1 and AH).
The proposed rule would lower risk weights on senior tranches compared
to the current ERCF.
For the illustrative CRT, the overall risk weights for the proposed
rule across tranches AH, M1, and B are 5%, 783%, and 1,250%, where 5%
reflects the proposed minimum risk weight. By comparison, the overall
risk weights under the ERCF across tranches AH, M1, and B are 10%,
785%, and 1,250%, where 10% reflects the minimum risk weight. The
difference between the M1 risk weights, 783% for the proposed rule and
785% for the ERCF, reflects a weighted average risk weight calculation
for M1 because M1's attachment and detachment points straddle stress
loss. That is, the weighted-average risk weight would be the average of
1,250 percent, weighted by the portion of the tranche exposed to
projected stress loss, and the minimum risk weight (5 percent for the
proposed rule and 10 percent for ERCF) weighted by the portion of the
tranche not exposed to projected stress loss.
[[Page 53241]]
Risk weights from the proposed rule:
[GRAPHIC] [TIFF OMITTED] TP27SE21.004
Next, the Enterprise would calculate the adjusted exposure amount
of its retained CRT exposures to reflect the effectiveness of the CRT
in transferring credit risk on the underlying mortgage exposures. For
the illustrative CRT, tranches AH and B are retained by the Enterprise,
and do not need further adjustment. Risk associated with tranche M1 is
transferred through a capital markets transaction and a loss sharing
agreement. For the proposed rule, risk transfer on this tranche is
subject to the following two effectiveness adjustments, which are
reflected in the Enterprise's adjusted exposure amount: Loss sharing
effectiveness adjustment (LSEA) and loss timing effectiveness
adjustment (LTEA). The current ERCF includes an additional on-the-top
overall effectiveness adjustment (OEA), which acts like a capital
relief haircut.
Both the proposed rule and the current ERCF utilize the same
methodology when accounting for the effectiveness of loss sharing on
tranche M1. In particular, both methods adjust the Enterprise's
exposure amount on tranche M1 to reflect the retention of some of the
counterparty credit risk that was nominally transferred to the
counterparty. To do so, the methods adjust effectiveness for: (i)
Uncollateralized unexpected loss (UnCollatUL); and (ii)
uncollateralized risk-in-force above stress loss (SRIF). The approaches
differ in their capitalization of SRIF. The proposed rule would
capitalize SRIF at a 5% risk weight and the current ERCF capitalizes
SRIF at a 10% risk weight, where the difference reflects the different
risk weight floors.
For the illustrative CRT, the counterparty haircut is 5.2% as per
the ERCF's single-family CP haircuts, UnCollatUL is 42.5%, and SRIF is
37.5%. The proposed rule's LTEA on tranche M1 would be 96.5%, which
when rounded, is the same figure for LTEA under the current ERCF.
LSEA from the proposed rule:
[[Page 53242]]
[GRAPHIC] [TIFF OMITTED] TP27SE21.005
Both the proposed rule and the current ERCF utilize the same
methodology when accounting for effectiveness from the timing of
coverage by adjusting the Enterprise's exposure amount for tranche M1
to reflect the retention of some loss timing risk that was nominally
transferred. The loss timing factor addresses the mismatch between
lifetime losses on the 30-year fixed-rate single-family mortgage
exposures underlying the CRT and the CRT's coverage. The loss timing
factor for the illustrative CRT with 10 years of coverage and backed by
30-year fixed-rate single-family whole loans and guarantees with OLTVs
greater than 60 percent and less than or equal to 80 percent is 88
percent for both the capital markets transaction and the loss sharing
agreement. For the illustrative CRT, tranche M1's LTEA is 85.6% and is
derived by scaling stress loss by the 88% loss timing factor.
LTEA from the proposed rule and the current ERCF:
[GRAPHIC] [TIFF OMITTED] TP27SE21.006
Where
LTKA, = max ((2.75% + 0.25%) * 88%-0.25%, 0%) = 2.39%
The current ERCF includes a third adjustment, the OEA, that the
proposed rule omits.
OEA from the current ERCF:
ERCF OEA = 100% * (1.06667-4.1667 * KA) = 95.2%
The next steps convert the effectiveness adjustments into
Enterprise exposures. In particular, the adjusted exposure amounts
(AEAs) combine the effectiveness adjustments, aggregate UPB, tranche
thickness, and an adjustment for expected losses (to tranche B in the
example). For the illustrative CRT, the proposed rule would calculate
AEAs as follows:
AEA,AH = EAE,AH * AggUPB$ * (D-A) = $1,000m
* (100%-4.5%) = $955m
[[Page 53243]]
AEA,M1 = EAE,M1 * AggUPB$ * (D-A) = 19.7% *
$1,000m * (45%-0.5%) = $7.9m
[GRAPHIC] [TIFF OMITTED] TP27SE21.007
where the Enterprise's adjusted exposures (EAEs) for tranches A and B
are 100% and
EAE,M1 = 100% - (60% * 85.6%) - (35% * 96.5% *
85.6%) = 19.7%.
The current ERCF calculates AEAs including the OEA, thus increasing
the Enterprise's exposure on M1. For tranches AH and B, the current
ERCF's AEAs are the same as those of the proposed rule because the
Enterprise does not transfer risk on the AH and B tranches.
ERCF--AEA,M1 = ERCF--EAE,M1 *
AggUPB$ * (D - A) = 23.6% * $1,000m * (4.5% - 0.5%) = $9.4m
ERCF--EAE,M1 = 100% - (60% * 85.6% * 95.2%) - (35% *
96.5% * 85.6% * 95.2%) = 23.6%
Finally, the risk weights and exposures are combined to calculate
risk-weighted assets. For the illustrative CRT, the proposed rule would
calculate risk-weighted assets (RWA) as follows:
RWA$,AH = AEA$,AH * RW,AH =
$955m * 5% = $47.8m
RWA = AEA$,M1 * RW,M1 = $7.9m * 783% =
$61.8m
RWA = AEA$,B * RW,B = $2.5m * 1250% =
$31.3m
with total RWAs on the retained CRT exposures at $140.8 million, a
decline of $202.9 million from the aggregate credit risk-weighted
assets on the underlying single-family mortgage exposures of $343.8
million.
By comparison, the current ERCF's total RWA are higher primarily
due to its higher risk weight floor on the senior AH exposure:
ERCF--RWA$,AH = ERCF--AEA$,AH * ERCF--
RW,AH = $955m * 10% = $95.5m
ERCF--RWA$,M1 = ERCF--AEA$,M1 * ERCF--
RW,M1 = $9.4m * 785% = $74.1m
ERCF--RWA$,B = ERCF--AEA$,B * ERCF--
RW,B = $2.5m * 1250% = $31.3m
with total RWAs on the retained CRT exposures at $200.8 million.
Overall, for this stylized CRT, the proposed rule's total RWA
capital relief of $202.9 million is 42 percent higher than the $143.0
million in capital relief from the current ERCF.
C. ERCF Technical Corrections
The proposed rule would make technical corrections to the ERCF
related to definitions, variable names, the single-family
countercyclical adjustment, and CRT formulas that were not accurately
reflected in the ERCF final rule published on December 17, 2020. These
technical corrections would revise the ERCF for the following items:
In Sec. 1240.2, the definition of ``Multifamily mortgage
exposure'' would be moved from its current location to a location that
follows alphabetical order relative to the other definitions within the
section. The definition of a multifamily mortgage exposure would not
change.
In Sec. 1240.33, the definition of ``Long-term HPI
trend'' would be updated to correct a typographical error that resulted
in only the coefficient of the trendline formula, 0.66112295, being
published. The corrected trendline formula would be
0.66112295e0.002619948*t). The Enterprises use
the long-term HPI trend as the basis for calculating the single-family
countercyclical adjustment. As published, the trendline would be a
time-invariant horizontal line rather than a time-varying exponential
function.
In Sec. 1240.33, the definition of OLTV for single-family
mortgage exposures would be amended to include the parenthetical
(original loan-to-value) after the acronym to provide additional
clarity as to the meaning of OLTV. Single-family OLTV would continue to
be based on the lesser of the appraised value and the sale price of the
property securing the single-family mortgage.
In Sec. 1240.37, the second paragraph (d)(3)(iii) would
be redesignated as paragraph (d)(3)(iv) to correct a typographical
error.
In Sec. 1240.43(b)(1), the term ``KG'' would be replaced
with ``KG'' to correct a typographical error.
In Sec. 1240.44,
[cir] In paragraph (b)(9)(i)(C), the term ``(LTFUPB%)'' would be
replaced with the term ``(LTFUPB)'' to correct a typographical
error;
[cir] In paragraph (b)(9)(i)(D), the term ``LTF%'' would be
replaced with the term ``LTF'' to correct a typographical
error;
[cir] In paragraph (b)(9)(ii), the term ``LTF%'' would be replaced
with the term ``LTF'' to correct a typographical error;
[cir] In paragraph (b)(9)(ii)(B), the term ``(CRTF15%)'' would be
replaced with the term ``(CRTF15)'' to correct a typographical
error;
[cir] In paragraph (b)(9)(ii)(C), the term ``(CRT80NotF15%)'' would
be replaced with the term ``(CRT80NotF15)'' to correct a
typographical error.
[cir] In paragraph (b)(9)(ii)(E)(2)(i), the equation would be
revised to correct a typographical error. The revised equation would
be:
LTF = (CRTLT15 * CRTF15) + (CRTLT80Not15 *
CRT80NotF15) + (CRTLTGT80Not15 * (1-CRT80NotF15 -
CRTF15));
[cir] In paragraph (b)(9)(ii)(E)(2)(iii), the term ``LTF%'' would
be replaced with the term ``LTF,'' to correct a typographical
error;
[cir] In paragraph (c) introductory text, the term ``RW%'' would be
replaced with the term ``RW'' to correct a typographical error;
[cir] In paragraph (c)(1), the term ``AggEL%'' would be replaced
with the term ``AggEL'' to correct a typographical error;
[cir] In paragraph (g), the first three equations would be combined
into one equation to correct a typographical error that erroneously
split the equation into three distinct parts. The revised equation
would be:
[[Page 53244]]
[GRAPHIC] [TIFF OMITTED] TP27SE21.008
IV. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.) requires
that regulations involving the collection of information receive
clearance from the Office of Management and Budget (OMB). The proposed
rule contains no such collection of information requiring OMB approval
under the PRA. Therefore, no information has been submitted to OMB for
review.
V. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. FHFA need not undertake such an
analysis if the agency has certified that the regulation will not have
a significant economic impact on a substantial number of small
entities. 5 U.S.C. 605(b). FHFA has considered the impact of the
proposed rule under the Regulatory Flexibility Act. The of FHFA
certifies that the proposed rule, if adopted as a final rule, would not
have a significant economic impact on a substantial number of small
entities because the proposed rule is applicable only to the
Enterprises, which are not small entities for purposes of the
Regulatory Flexibility Act.
Proposed Rule
List of Subjects for 12 CFR Part 1240
Capital, Credit, Enterprise, Investments, Reporting and
recordkeeping requirements.
Authority and Issuance
For the reasons stated in the Preamble, under the authority of 12
U.S.C. 4511, 4513, 4513b, 4514, 4515-17, 4526, 4611-4612, 4631-36, FHFA
proposes to amend part 1240 of title 12 of the Code of Federal
Regulation as follows:
Chapter XII--Federal Housing Finance Agency
Subchapter C--Enterprises
PART 1240--CAPITAL ADEQUACY OF ENTERPRISES
0
1. The authority citation for part 1240 is revised to read as follows:
Authority: 12 U.S.C. 4511, 4513, 4513b, 4514, 4515, 4517, 4526,
4611-4612, 4631-36.
0
2. Amend Sec. 1240.2 by removing the definition of ``Multifamily
mortgage exposure'' and adding the definition of ``Multifamily mortgage
exposure'' in alphabetical order to read as follows:
Sec. 1240.2 Definitions.
* * * * *
Multifamily mortgage exposure means an exposure that is secured by
a first or subsequent lien on a property with five or more residential
units.
* * * * *
0
3. Amend Sec. 1240.11 by revising paragraph (a)(6) to read as follows:
Sec. 1240.11 Capital conservation buffer and leverage buffer.
(a) * * *
(6) Prescribed leverage buffer amount. An Enterprise's prescribed
leverage buffer amount is 50 percent of the Enterprise's stability
capital buffer calculated in accordance with subpart G of this part.
0
4. Amend Sec. 1240.33(a) by:
0
a. In the definition of ``Long-term HPI trend'', removing
``0.66112295'' and adding ``0.66112295e0.002619948*t)'' in
its place; and
0
b. Revising the definition of ``OLTV''.
The revision reads as follows:
Sec. 1240.33 Single-family mortgage exposures.
(a) * * *
OLTV (original loan-to-value) means, with respect to a single-
family mortgage exposure, the amount equal to:
(i) The unpaid principal balance of the single-family mortgage
exposure at origination; divided by
(ii) The lesser of:
(A) The appraised value of the property securing the single-family
mortgage exposure; and
(B) The sale price of the property securing the single-family
mortgage exposure.
* * * * *
Sec. 1240.37 [Amended]
0
5. Amend Sec. 1240.37 by redesignating the second paragraph
(d)(3)(iii) as paragraph (d)(3)(iv).
Sec. 1240.43 [Amended]
0
6. Amend Sec. 1240.43 in paragraph (b)(1) by removing the term ``KG''
and adding the term ``KG'' in its place.
0
7. Amend Sec. 1240.44 by:
0
a. In paragraph (b)(9)(i)(C), removing the term ``(LTFUPBE%)'' and
adding the term ``(LTFUPB)'' in its place;
0
b. In paragraph (b)(9)(i)(D) introductory text, removing the term
``LTF%'' and adding the term ``LTF'' in its place;
0
c. In paragraph (b)(9)(ii) introductory text, removing the term
``LTF%'' and adding the term ``LTF'' in its place;
0
d. In paragraph (b)(9)(ii)(B), removing the term ``(CRTF15%)'' and
adding the term ``(CRTF15)'' in its place;
0
e. In paragraph (b)(9)(ii)(C), removing the term ``(CRT80NotF15%)'' and
adding the term ``(CRT80NotF15)'' in its place;
0
f. Revising the equation in paragraph (b)(9)(ii)(E)(2)(i);
0
g. In paragraph (b)(9)(ii)(E)(2)(iii) introductory text, removing the
term ``LTF%'' and adding the term ``LTF,'' in its place;
0
h. In paragraph (c) introductory text:
0
i. Removing the term ``RW%'' and adding the term ``RW'' in its
place; and
0
ii. Removing ``10 percent'' and adding the term ``5 percent'' in its
place;
0
i. In paragraph (c)(1), removing the term ``AggEL%'' and adding the
term ``AggEL'' in its place;
0
j. In paragraphs (c)(2) and (c)(3)(ii), removing the term ``10
percent'' and adding the term ``5 percent'' in its place;
0
k. Revising the first equation in paragraph (d);
[[Page 53245]]
0
l. In paragraph (e), removing the term ``10 percent'' and adding the
term ``5 percent'' in its place;
0
m. Revising paragraph (f)(2)(i);
0
n. In paragraph (g), revising the first three equations;
0
o. Revising the first equation in paragraph (h); and
0
p. Removing and reserving paragraph (i).
The revisions read as follows:
Sec. 1240.44 Credit risk transfer approach (CRTA).
* * * * *
(b) * * *
(9) * * *
(ii) * * *
(E) * * *
(2) * * *
(i) * * *
* * * * *
(d) * * *
[GRAPHIC] [TIFF OMITTED] TP27SE21.009
* * * * *
(f) * * *
(2) Inputs--(i) Enterprise adjusted exposure. The adjusted exposure
(EAE) of an Enterprise with respect to a retained CRT exposure is as
follows:
EAE,Tranche = 100% - (CM,Tranche *
LTEA,Tranche,CM) -(LS,Tranche * LSEA,Tranche *
LTEA,Tranche,LS),
Where the loss timing effectiveness adjustments (LTEA) for a retained
CRT exposure are determined under paragraph (g) of this section, and
the loss sharing effectiveness adjustment (LSEA) for a retained CRT
exposure is determined under paragraph (h) of this section.
* * * * *
(g) * * *
[GRAPHIC] [TIFF OMITTED] TP27SE21.010
* * * * *
(h) * * *
[GRAPHIC] [TIFF OMITTED] TP27SE21.011
[[Page 53246]]
* * * * *
Sandra L. Thompson,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2021-20297 Filed 9-24-21; 8:45 am]
BILLING CODE 8070-01-P