Comment letter to FHFA: Enterprise Capital Requirements – AEI – American Enterprise Institute: Freedom, Opportunity, Enterprise17th November 2018
This proposal is important, despite its inapplicability to the GSEs in conservatorship, because it is intended to serve as guide to estimating capital costs in pricing new business activities and because it may serve as a guide to what is appropriate capital for similar post-conservatorship institutions.
Getting this right is of particular importance because the GSEs currently back nearly one half of the institutionally financed single family housing transactions in the US, and the last regulatory effort to establish appropriate capital levels for the GSEs ended in a spectacular failure, notwithstanding spending a decade-long regulatory effort to develop capital standards.
The proposed rule pays insufficient attention to the unique risks attendant to the mortgage guarantee business and the GSEs’ outsized role in this business. Specifically, its binding, risk-based rules would not require enough capital to address another housing crisis of comparable magnitude to the most recent one, and its minimum leverage ratios would not be consistent with requirements for global systemically important banks (G-SIBs) given the de facto status of the GSEs as systematically important financial institutions (SIFIs). The result would be underpricing of risks and exacerbation of house price cycles.
Our recommended changes to the capital requirements, with a focus on single-family whole loans and guarantees, would result in additional risk-based capital of more than 200 basis points relative to FHFA’s proposal and a minimum leverage ratio of 4 percent.
Read the full comment letter here.