[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
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 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \13\ 85 FR at 39335 (June 30, 2020).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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