[Federal Register Volume 87, Number 51 (Wednesday, March 16, 2022)]
[Rules and Regulations]
[Pages 14764-14772]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-04529]



[[Page 14764]]

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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1240

RIN 2590-AB17


Enterprise Regulatory Capital Framework--Prescribed Leverage 
Buffer Amount and Credit Risk Transfer

AGENCY: Federal Housing Finance Agency.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is 
adopting a final rule (final rule) that amends 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 final rule also 
makes technical corrections to various provisions of the ERCF that was 
published on December 17, 2020.

DATES: This rule is effective May 16, 2022.

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 Ming-Yuen Meyer-Fong, Associate 
General Counsel, Office of General Counsel, (202) 649-3078, [email protected]. These are not toll-free numbers. For TTY/TRS 
users with hearing and speech disabilities, dial 711 and ask to be 
connected to any of the contact numbers above.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Overview of the Final Rule
    A. Amendments to the ERCF
    B. Effective Date
III. General Comments on the Proposed Rule
    A. 20 Percent Risk Weight Floor
    B. Multifamily Countercyclical Adjustment
IV. Leverage Buffer
V. Credit Risk Transfer
VI. ERCF Technical Corrections
VII. Paperwork Reduction Act
VIII. Regulatory Flexibility Act
IX. Congressional Review Act

I. Introduction

    On September 27, 2021, FHFA published in the Federal Register a 
notice of proposed rulemaking (proposed rule) seeking comments on 
amendments to the ERCF that would refine the leverage buffer and the 
risk-based capital treatment for retained CRT exposures.\1\ FHFA 
proposed these amendments to ensure that the ERCF appropriately 
reflects the risks inherent to the Enterprises' business models and 
contains proper incentives for the Enterprises to distribute acquired 
credit risk to private investors rather than to buy and hold that risk. 
In meeting these objectives, the proposed amendments would help restore 
FHFA's intended paradigm of having the Enterprises' leverage capital 
requirements and buffer provide a credible backstop to their risk-based 
capital requirements and buffers, enhancing the safety and soundness of 
the Enterprises. FHFA is now adopting in this final rule the proposed 
amendments, substantially as proposed.
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    \1\ 86 FR 53230.
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    FHFA published the ERCF on December 17, 2020 \2\ with the purpose 
of implementing a going-concern regulatory capital standard to ensure 
that each Enterprise 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.\3\ The ERCF, which became effective on February 16, 2021, aimed 
to address issues that arose during the notice and comment period such 
as the pro-cyclicality of the single-family risk-based capital 
requirements, the quality of Enterprise capital used to meet the 
capital requirements, and the quantity of required capital at the 
Enterprises. Accordingly, the ERCF is significantly stronger than the 
statutory framework which governed the Enterprises' capital 
requirements prior to entering conservatorships.
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    \2\ 85 FR 82150.
    \3\ In conservatorships, the Enterprises are supported by Senior 
Preferred Stock Purchase Agreements (PSPAs) between the U.S. 
Department of the Treasury (Treasury) and each Enterprise, through 
FHFA as its conservator (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). The PSPAs, as amended by letter agreements 
executed by the parties on January 14, 2021 (2021 Fannie Mae Letter 
Agreement, https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Fannie-Mae.pdf; 2021 Freddie Mac Letter 
Agreement, https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Freddie%20Mac.pdf), 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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    However, after finalizing the ERCF, FHFA identified specific 
aspects of the framework that might incentivize risk taking in certain 
economic environments and create disincentives to the Enterprises' CRT 
programs. Together, these features of the ERCF could result in an 
excessive buildup of risk accruing to taxpayers and the housing finance 
market, particularly because the Enterprises presently are severely 
undercapitalized and lack the resources on their own to safely absorb 
the credit risk associated with their normal operations.
    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. 
Since their development began in 2013, the CRT programs have been the 
Enterprises' primary mechanism to successfully effectuate reliable risk 
transfer to the private sector. Through these programs, the Enterprises 
have shed a significant amount of credit risk to help protect against 
potential losses while the PSPAs have significantly limited the 
Enterprises' ability to hold capital and withstand losses through 
normal operations. During this current period where the Enterprises are 
building capital, CRT remains an important risk mitigation tool to 
protect taxpayers against the heightened risk of potential PSPA draws 
in the event of a significant stress to the housing sector. It is 
therefore crucial that the Enterprises' capital requirements are 
appropriately sized, where the leverage capital framework is a credible 
backstop to the risk-based capital framework and where responsible and 
effective risk transfer is not unduly discouraged.

II. Overview of the Final Rule

A. Amendments to the ERCF

    After carefully considering the comments on the proposed rule, and 
as described in this preamble, FHFA is adopting, substantially as 
proposed, amendments to the leverage buffer and risk-based capital 
treatment of CRT exposures. FHFA continues to believe that the 
amendments in this final rule will lessen the potential deterrents to 
Enterprise risk transfer by properly aligning incentives in the ERCF 
and will position the Enterprises to operate in a

[[Page 14765]]

safe and sound manner to fulfill their statutory mission throughout the 
economic cycle, both during and after conservatorships. Specifically, 
the final rule will:
     Replace the fixed leverage buffer equal to 1.5 percent of 
an Enterprise's adjusted total assets with a dynamic leverage buffer 
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 12 CFR 1240.44(f) and (i).
    In addition, the final rule will implement technical corrections to 
various provisions of the ERCF that was published on December 17, 2020, 
highlighted by a significant typographical error in the definition of 
the long-term HPI trend that constitutes the basis for calculating the 
single-family countercyclical adjustment.

B. Effective Date

    Under the rule published on December 17, 2020 establishing the 
ERCF, an Enterprise will not be subject to any requirement in the ERCF 
until the compliance date for the requirement as detailed in the ERCF. 
The effective date for the ERCF was February 16, 2021. The effective 
date for the ERCF amendments and technical corrections in this final 
rule will be 60 days after the day of publication of this final rule in 
the Federal Register.

III. General Comments on the Proposed Rule

    FHFA received 89 public comment letters on the proposed rule from a 
variety of interested parties, including private individuals, trade 
associations, consumer advocacy groups, think-tanks and institutes, and 
financial institutions.\4\ In general, and as discussed in greater 
detail below in the relevant sections of this preamble, commenters were 
supportive of FHFA's proposed amendments to both the leverage buffer 
and the risk-based capital treatment of retained CRT exposures. 
Overall, most commenters supported FHFA's efforts to restore the 
intended paradigm between leverage capital and risk-based capital at 
the Enterprises and to properly incentivize risk transfer within the 
ERCF. However, as discussed in the relevant sections of this preamble, 
FHFA also received a number of comments indicating concern over various 
aspects of the proposed amendments.
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    \4\ See comments on Amendments to the Enterprise Regulatory 
Capital Framework Rule--Prescribed Leverage Buffer Amount and Credit 
Risk Transfer, available at https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=708. The 
comment period for the proposed rule closed on November 26, 2021.
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    Over half of the 89 comments FHFA received during this notice and 
comment period focused on issues not directly related to the proposed 
amendments or technical corrections. In these letters, commenters 
offered views on important topics such as loan-level pricing 
adjustments, incorporating guarantee fees into capital requirements, 
the ERCF grids and risk multipliers, the magnitude of single-family and 
multifamily risk weights, various other aspects of the CRT 
securitization framework, the costs of CRT transactions, and the 
overall complexity of the ERCF, among others. In addition, commenters 
offered views on housing finance reform and on matters relating to the 
Enterprises' conservatorships, including issues related to the 
Enterprises' consent to conservatorships in 2008, subsequent actions by 
FHFA or the U.S. Department of the Treasury (Treasury), the magnitude 
of funds remitted to Treasury by the Enterprises relative to cumulative 
draws, Treasury's financial interests in the Enterprises, and the 
PSPAs. FHFA acknowledges the importance of these topics and will 
thoroughly consider the public's feedback on these issues when relevant 
rulemakings and policy decisions are under consideration.
    In addition to soliciting comments on the proposed amendments and 
technical corrections, FHFA also sought feedback on two additional 
topics related to the ERCF: The 20 percent risk weight floor on single-
family and multifamily mortgage exposures and potential options for a 
countercyclical adjustment for multifamily mortgage exposures. FHFA 
received feedback on both topics.

A. 20 Percent Risk Weight Floor

    FHFA asked the public whether, in light of the proposed changes to 
the leverage buffer and the risk-based capital requirements for 
retained CRT exposures, the prudential risk weight floor of 20 percent 
on single-family and multifamily mortgage exposures was appropriately 
calibrated. FHFA did not propose a change to the risk weight floor on 
single-family and multifamily mortgage exposures. Nine commenters 
provided feedback on this question, and the opinions expressed by 
commenters were varied.
    Some commenters recommended reducing or eliminating the 20 percent 
risk weight floor. Among these commenters, some suggested that lowering 
the floor is appropriate due to the Enterprises' improved balance 
sheets and mortgage lending standards relative to pre-crisis economics. 
Others suggested that the 20 percent risk weight floor in the ERCF is 
not appropriately calibrated. Another commenter suggested that the 20 
percent floor distorts market signals about risk and incentivizes risk 
taking by the Enterprises.
    Conversely, some commenters recommended maintaining the 20 percent 
risk weight floor. Among these commenters, some suggested that such a 
floor is prudent to ensuring the safety and soundness of the 
Enterprises. One commenter suggested that the risk weight floor is 
useful as an incentive for the Enterprises to transfer credit risk on 
lower-risk exposures. Another commenter suggested that the risk weight 
floor is important to mitigate the model risks inherent in the risk-
sensitive methodology FHFA used to calibrate risk weights for mortgage 
exposures. One commenter suggested that reducing this risk weight floor 
could significantly increase the gap between the credit risk capital 
requirements of the Enterprises and other market participants.
    One of the key objectives FHFA cited for proposing amendments to 
the ERCF was to ensure the leverage capital framework was a credible 
backstop to the risk-based capital framework. Despite changes to the 
2020 ERCF proposed rule \5\ that increased risk-based capital under the 
2020 ERCF final rule, including raising the 15 percent risk weight 
floor on single-family and multifamily mortgage exposures to 20 percent 
and changing the dataset on which the single-family countercyclical 
adjustment is calculated, tier 1 leverage capital remains greater than 
tier 1 risk-based capital at each Enterprise in the absence of the 
leverage buffer and CRT amendments in the proposed rule. Should FHFA 
materially reduce the 20 percent floor on single-family and multifamily 
mortgage exposures without taking additional action, the likelihood 
that the leverage framework would once again be the binding capital 
constraint for the Enterprises would significantly increase. For this 
reason, and given the commenters' diverse feedback, FHFA has determined 
not to take action related to the 20 percent risk weight

[[Page 14766]]

floor on single-family and multifamily mortgage exposures at this time.
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    \5\ 85 FR 39274.
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B. Multifamily Countercyclical Adjustment

    FHFA also asked the public to recommend an approach for mitigating 
the pro-cyclicality of the credit risk capital requirements for 
multifamily mortgage exposures that relies only on non-proprietary data 
or indices. Eight commenters provided feedback on this question, 
recommending three different types of approach. The first group of 
commenters suggested solutions following the same principles as FHFA's 
single-family countercyclical adjustment, where risk attributes such as 
the loan-to-value (LTV) ratio would be adjusted up or down depending on 
deviations from a long-term trend. For use in this approach, commenters 
recommended FHFA consider the property index published by the National 
Council of Real Estate Investment Fiduciaries (NCREIF), long-term 
vacancy rates, long-term property value and income growth rates, and 
adjusted cap rates. The second group of commenters recommended FHFA 
consider an approach where the countercyclical adjustment is based on 
ratios of index peaks to current values. Commenters suggested FHFA 
could use the NCREIF property index for property values and Enterprise 
investor reporting for net operating income (NOI). This approach would 
assume that the multifamily risk weights already account for a 35 
percent shock to property values and a 15 percent shock to NOI, so an 
adjustment would be made only to the extent that the property value 
and/or NOI index ratios suggest a further adjustment is necessary. 
Finally, one commenter suggested that FHFA should address pro-
cyclicality for multifamily mortgage exposures by replacing mark-to-
market LTV with original LTV and mark-to-market debt service coverage 
ratio (DSCR) with original DSCR.
    FHFA appreciates the public's feedback on this topic and is 
committed to addressing the pro-cyclicality in the capital required for 
multifamily mortgage exposures. However, given the complexity of 
potential solutions and the diversity of suggestions provided by 
commenters, FHFA has determined that this topic requires further 
consideration, potentially in a future rulemaking. Therefore, FHFA has 
determined not to take action related to a multifamily countercyclical 
adjustment at this time.

IV. Leverage Buffer

    The proposed rule would amend the ERCF by replacing the fixed tier 
1 capital leverage buffer equal to 1.5 percent of an Enterprise's 
adjusted total assets with a dynamic tier 1 capital leverage buffer 
equal to 50 percent of the Enterprise's stability capital buffer.\6\ In 
the proposed rule, FHFA presented several benefits to this approach.
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    \6\ 12 CFR 1240.400.
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    First, a properly calibrated leverage ratio requirement and 
leverage buffer are critical aspects of a sound regulatory capital 
framework. The purpose of leverage capital is to promote financial 
stability by establishing a robust capital floor that persists 
throughout the economic cycle and by limiting risk taking when risk-
based capital may otherwise fall to unduly low levels. Recalibrating 
the 1.5 percent leverage buffer will promote safety and soundness and 
financial stability at the Enterprises by lessening the likelihood that 
leverage capital will drive Enterprise decision-making in the majority 
of economic environments and reduce the frequency in which an 
Enterprise has an incentive to take on more risk in a capital 
optimization strategy. Furthermore, restoring leverage capital to a 
position of a credible backstop will allow other aspects of the ERCF, 
namely the risk-based capital requirements, including the single-family 
countercyclical adjustment, to work as intended. Second, the proposed 
leverage buffer amendment will encourage the Enterprises to transfer 
risk rather than to buy and hold risk. Third, a leverage framework with 
a dynamic buffer that grows and shrinks as an Enterprise grows and 
shrinks, respectively, will function as a better backstop to a risk-
based capital framework that includes a stability capital buffer linked 
to an Enterprise's size. And fourth, a dynamic leverage buffer that is 
tied to the stability capital buffer will further align the ERCF with 
Basel III standards. Internationally, under the latest Basel framework 
adopted by the Bank for International Settlements, global systemically 
important banks (G-SIBs) are required to hold a leverage buffer equal 
to 50 percent of their higher loss-absorbency risk-based requirements--
a measure akin to the G-SIB surcharge in the U.S. banking framework--to 
tailor an institution's leverage ratio to its business activities and 
risk profile.
    The vast majority of comments FHFA received supported decreasing 
the tier 1 capital leverage buffer from a fixed 1.5 percent of adjusted 
total assets. Many commenters supported FHFA's proposed approach, while 
some supported decreasing the leverage buffer without tying it to the 
stability capital buffer and others favored eliminating the leverage 
buffer altogether.
    Many commenters who recommended decreasing the leverage buffer 
suggested doing so because it is preferrable for risk-based capital 
metrics to be the binding capital constraint more frequently than non-
risk-based capital floors such as leverage. Commenters suggested that 
this paradigm helps eliminate incentives for the Enterprises to 
increase risk taking and risk retention while providing flexibility to 
the Enterprises as they manage risk and rebuild robust levels of 
capital. In addition, commenters agreed with FHFA that a smaller 
leverage buffer would encourage the transfer of mortgage credit risk 
from the Enterprises to private investors. Another commenter stated 
that the 1.5 percent leverage buffer is unnecessary relative to the 
Enterprises' recent stress test results, and that such a high buffer 
would likely be excessive to the point of impairing the Enterprises' 
ability to support the market and meet their mission.
    Many commenters expressed their general support for FHFA's proposed 
approach of tying the leverage buffer to the stability capital buffer. 
Commenters contended that a dynamic leverage buffer that expands and 
contracts with an Enterprise as its size and strategy evolve would more 
accurately reflect the Enterprise's risk and thereby help facilitate 
the Enterprises' ability to carry out their missions through all 
economic cycles. Thus, commenters reasoned that the proposed approach 
would help leverage serve as a credible backstop to the risk-based 
capital framework and allow the Enterprises to withstand losses in 
excess of those experienced during the great financial crisis. Other 
commenters supported FHFA's effort to move toward a dynamic leverage 
buffer to better reflect the spirit and intent of the leverage ratio, 
and also because dynamic buffers have proven to be an effective tool 
for managing capital at the global systemically important banks. 
Another commenter suggested that the proposed approach will help 
provide stability in the mortgage market and increase investor 
confidence in the Enterprises and overall economy throughout the 
economic cycle, helping stave off the need for emergency taxpayer 
intervention. Another commenter stated that basing the leverage buffer 
on a risk-based capital metric is preferrable because it better 
reflects the varying levels of risk within an Enterprise's particular 
pool of total assets.
    Some commenters expressed more reserved support for setting the 
leverage buffer equal to 50 percent of the stability

[[Page 14767]]

capital buffer. Several commenters expressed concern that tying the 
leverage buffer to the stability capital buffer could have pro-cyclical 
implications in the sense that an Enterprise's market share tends to 
grow during a stress when other market participants are growing slowly 
or shrinking. Thus, requiring an Enterprise to increase its leverage 
buffer during the period when the Enterprise is fulfilling its 
countercyclical role could limit the Enterprise's ability to supply 
market liquidity when it is most needed. In contrast to these 
commenters' concern, FHFA anticipates that setting the leverage buffer 
equal to 50 percent of the stability capital buffer will actually 
reduce the pro-cyclicality of the leverage framework because increases 
to an Enterprise's adjusted total assets are reflected in the fixed 1.5 
percent leverage buffer immediately whereas increases to an 
Enterprise's share of the overall mortgage market are reflected in the 
stability capital buffer with up to a two-year delay.\7\ FHFA believes 
this delayed need to raise capital relative to the current ERCF will 
facilitate the Enterprises' abilities to provide liquidity to the 
mortgage market during a stress, even if an Enterprise grows its 
portfolio as a result of fulfilling its countercyclical mission.
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    \7\ Id.
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    A few other commenters supported FHFA's proposed amendments but 
recommended that FHFA: i. Continue to study the relationship between 
leverage, risk-based capital, and the stability capital buffer to 
determine definitively that the leverage buffer should be linked to the 
stability capital buffer; and ii. provide historical data affirming the 
proposed approach and demonstrating that under the proposed amendments 
leverage will rarely exceed risk-based capital.
    Another commenter recommended that FHFA must ensure that its 
regulatory capital framework avoids discriminatory outcomes and 
promotes equitable treatment of borrowers and communities of color. One 
commenter supported FHFA's proposed amendments but expressed a desire 
for FHFA to be more anticipatory and expansive in the list of 
provisions it chooses to reconsider.
    Some commenters recommended decreasing the leverage buffer but not 
tying it to the stability capital buffer. One commenter expressed 
concern that the stability capital buffer was itself arbitrarily 
determined, so by association a leverage buffer equal to 50 percent of 
the stability capital buffer is also arbitrarily determined. This 
commenter recommended that FHFA consider alternative methods of the 
setting the leverage buffer that are more closely tied to an 
Enterprise's risk. One commenter recommended that FHFA decrease an 
Enterprise's leverage buffer by some estimate of future guarantee fees. 
Similarly, another commenter recommended that FHFA decrease an 
Enterprise's leverage buffer to reflect risk transferred through CRT in 
the same way that the risk-based capital framework provides capital 
relief for CRT. Several commenters recommended FHFA simply reduce the 
leverage buffer from 1.5 percent of adjusted total assets to a lower 
percentage of adjusted total assets, such as 0.5 percent, because 
market share is not a reasonable representation of Enterprise risk.
    Some commenters recommended FHFA eliminate the leverage buffer 
completely. These commenters generally viewed the leverage buffer as 
not necessary for the leverage framework to be a credible backstop to 
the risk-based capital framework. Two commenters suggested the 2.5 
percent leverage capital requirement is itself sufficient as a credible 
backstop to risk-based capital in the ERCF. Another commenter suggested 
the leverage buffer is unnecessary because: i. Stress losses on a new 
month of originations are lower than the capital required by the ERCF; 
and ii. future guarantee fees provide a significant source of claims-
paying resources, which are not considered as a source of capital in 
the framework. One commenter suggested FHFA eliminate the leverage 
buffer rather than decrease it because a future FHFA director can just 
as easily increase it again.
    Finally, some commenters recommended that FHFA maintain the fixed 
1.5 percent leverage buffer. One commenter claimed that FHFA does not 
provide evidence that the existing ERCF leverage-based requirements 
would be binding throughout the economic cycle, and that it is 
difficult to envision any realistic scenario in which the proposed 
amendments to the leverage buffer would result in a leverage-based 
requirement that could exceed the risk-based requirement, violating the 
concept of being a credible backstop. FHFA disagrees with the premise 
of this argument because the argument compares tier 1 leverage capital 
to adjusted total risk-based capital, which includes tier 2 capital. 
When looking only at tier 1 capital, one can readily construct 
realistic scenarios where tier 1 risk-based capital at an Enterprise 
decreases due to a period of sustained house price appreciation such 
that tier 1 leverage capital exceeds tier 1 risk-based capital and 
therefore leverage becomes the binding capital constraint.
    The commenter also suggests that FHFA fails to explain how the 
calibration of the 1.5 percent leverage buffer is flawed and how the 
proposed leverage buffer is analogous to the risk-weighted-asset-based 
Basel leverage buffer for international G-SIBs. In the proposed rule, 
FHFA discussed how the leverage framework unduly disincentivizes risk 
transfer predominately due to the outsized leverage buffer, and how a 
fixed leverage buffer may not concurrently be appropriate for both a 
large and a small Enterprise. FHFA views these characteristics as flaws 
in the calibration of the leverage buffer because the design could 
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. In addition, 
FHFA discussed how the proposed leverage buffer is similar to the Basel 
leverage buffer in that both are derived from measures that attempt to 
quantify the amount of systemic risk posed by the Enterprises and G-
SIBs, respectively--the stability capital buffer in the ERCF and the G-
SIB surcharge in the Basel framework. There are, of course, structural 
differences between the two buffers in both derivation and application, 
as is appropriate given that the Enterprises and the other financial 
institutions have different business models.
    Furthermore, two commenters noted that the Financial Stability 
Oversight Council's (FSOC) review of the 2020 ERCF proposed rule found 
that capital requirements ``that are materially less than those 
contemplated by [the proposed rule] would likely not adequately 
mitigate the potential stability risk posed by the Enterprises,'' and 
that the proposed rule would result in a material two-thirds reduction 
to the leverage buffer, increasing risks to taxpayers and financial 
stability. FHFA generally agrees with the findings presented in FSOC's 
activities-based review of the secondary mortgage market.\8\ However, 
similar to approaches followed by other financial regulators, FHFA 
intends to periodically review the ERCF and adjust various elements as 
necessary to ensure the safety and soundness of the Enterprises so they 
can carry out their mission throughout the economic cycle. In addition, 
FHFA notes that Federal Reserve officials have publicly

[[Page 14768]]

identified binding leverage capital requirements under the 
Supplementary Leverage Ratio (SLR) framework as an important issue that 
must be addressed so that banks' incentives are not skewed to increase 
risk-taking. FHFA continues to agree with this guiding principle for 
the Enterprises under the ERCF.
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    \8\ https://home.treasury.gov/news/press-releases/sm1136.
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    The final rule adopts the dynamic tier 1 capital leverage buffer 
equal to 50 percent of the stability capital buffer as proposed. In 
consideration of the public comments on the proposed rule, FHFA 
continues to believe that such a leverage buffer determined in this 
manner will best position the Enterprises to fulfil their mission in a 
safe and sound manner throughout the economic cycle by ensuring that 
the leverage framework acts as a credible backstop to the risk-based 
capital framework and by encouraging the Enterprises to transfer credit 
risk rather than to buy and hold risk.
    FHFA notes that the final rule will not change the tier 1 leverage 
capital requirement, which will remain at 2.5 percent of adjusted total 
assets. This requirement, plus other features of the ERCF such as the 
single-family countercyclical adjustment and the risk weight floor on 
single-family and multifamily mortgage exposures, will continue to 
mitigate the potential stability risk posed by the Enterprises and will 
ensure an Enterprise maintains robust capital even during the best 
economic conditions when risk-based capital requirements might fall due 
to significant house price appreciation.
    In addition, FHFA continues to believe that the leverage buffer 
plays an important role in the ERCF, despite the recommendations of 
several commenters to eliminate the buffer. The leverage buffer 
represents a cushion above an Enterprise's 2.5 percent leverage ratio 
requirement that can be drawn down in a stress scenario without 
violating prompt corrective action, providing an Enterprise with 
flexibility to continue its normal operations without risk of breaching 
a requirement.

V. Credit Risk Transfer

    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 and would remove the requirement that an 
Enterprise must apply an overall effectiveness adjustment to its 
retained CRT exposures.\9\
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    \9\ 12 CFR 1240.44(f) and (i).
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    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 housing finance more generally. 
Consequently, the vast majority of comments FHFA received on the 
proposed amendments to the risk-based capital requirements for retained 
CRT exposures were generally supportive of the amendments. However, a 
minority of comments questioned the efficacy of CRT and noted that the 
amendments would weaken the Enterprises' financial resilience. Several 
other commenters offered broad critiques of and suggestions for the 
risk-based capital approach to CRT and the Enterprises' CRT programs 
more generally. While FHFA appreciates and considers all comments, the 
following discussion focuses on comments directly pertaining to the 
amendments put forward in the proposed rule.

CRT Risk Weight Floor

    In the proposed rule, FHFA contended that amending the CRT risk 
weight floor was necessary for two reasons. First, 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 risk transfer. 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. Second, the 10 percent risk weight floor 
discourages CRT through its duplicative nature. The operational 
criteria for CRT, which state that FHFA must approve each transaction 
as being effective in transferring the credit risk, as well as the 
Enterprises' own ability to mitigate unknown risks through their 
underwriting standards and servicing and loss mitigation programs, 
lessen the need for a tranche-level risk weight floor as high as 10 
percent.
    Commenters were generally very supportive of the proposed amendment 
to the CRT risk weight floor. Commenters suggested that reducing the 
risk weight floor on retained CRT exposures from 10 percent to 5 
percent raises the regulatory value of risk transfer closer to its 
economic value. Commenters stated that the change would restore the 
incentive for the Enterprises to engage in CRT to disperse credit risk 
among private investors and thereby lessen the systemic risk posed by 
the Enterprises. Commenters also suggested that transferring credit 
risk away from the Enterprises strengthens their safety and soundness 
and supports the overall mortgage market, including by promoting 
greater private market participation without an adverse impact on 
affordability. Several commenters supported the 5 percent floor because 
it represents a more market-sensitive treatment of CRT and better 
aligns capital to risk. In this regard, one commenter suggested that 
unduly high capital requirements will hamper an Enterprise's ability to 
fulfill its statutory mission of facilitating loans to low-income and 
very low-income borrowers and communities. In addition, commenters 
suggested that the 5 percent floor would provide reasonable protection 
from model risk while maintaining a conservative discount to equity 
capital, which has flexibility and fungibility advantages.
    Furthermore, several commenters recommended lowering the CRT risk 
weight floor below 5 percent or eliminating it altogether. Commenters 
suggested that the floor is not analytically supported and provides 
excessive protection against CRT-related risks. One commenter's 
analysis suggested that CRT requirements are too stringent even if the 
floor is removed and recommended that FHFA calibrate the risk-based 
capital requirements for retained CRT exposures to be consistent with 
the economics of CRT transactions.
    A few commenters recommended rejecting the proposed amendment in 
favor of the 10 percent risk weight floor. Several commenters claimed 
that the proposed amendment weakens the financial resilience of the 
Enterprises. These commenters suggested that the amendments will 
increase leverage at the Enterprises which will increase insolvency 
risk, and that FHFA should not balance incentivizing CRT with safety 
and soundness when considering capital standards.
    Some commenters generally supported FHFA's proposal to lower the 
CRT risk weight floor but offered alternatives to the 5 percent floor 
in the proposed rule. A few commenters recommended that FHFA apply the 
CRT risk weight floor on a sliding scale such that the risk weight 
floor decreases as credit risk becomes more remote. A few commenters 
suggested that the floor should reflect an exposure-level analysis and 
perhaps be functionally related to economic variables such as seasoning 
or house price appreciation. One commenter recommended removing the 
floor and using an econometric approach that requires capital above the 
risk-based capital amount and provides a marginal benefit

[[Page 14769]]

to risk reduction activities beyond stress loss.
    The final rule adopts the prudential floor of 5 percent on the risk 
weight assigned to any retained CRT exposure as proposed. In 
consideration of the public comments on the proposed rule, FHFA 
continues to believe that a prudential risk weight of 5 percent 
sufficiently ensures the viability of CRTs while mitigating their 
safety and soundness, mission, and housing stability risks. The final 
rule does not eliminate the CRT risk weight floor, as recommended by 
some commenters, because the prudential floor for a retained CRT 
exposure avoids treating that exposure as posing no credit risk, which 
continues to be an important policy objective for FHFA. In addition, 
FHFA has determined to finalize the 5 percent risk weight floor as 
proposed rather than adopting one of the alternatives suggested by 
commenters in order to maintain consistency with other aspects of the 
CRT securitization framework that were designed with a static risk 
weight floor in mind.

Overall Effectiveness Adjustment

    In the proposed rule, FHFA presented rationale for eliminating the 
overall effectiveness adjustment due to the duplicative nature of the 
adjustment within the risk-based capital requirements for retained CRT 
exposures. Unlike the counterparty and loss-timing effectiveness 
adjustments in the CRT securitization framework, the overall 
effectiveness adjustment does not target specific risks. Rather, 
similar to the risk weight floor on retained CRT exposures and the CRT 
operational criteria, the overall effectiveness adjustment was designed 
to address risks that are difficult to measure, such as model risk and 
the loss-absorbing benefits of equity capital relative to CRT. FHFA 
reasoned that, considering the additional elements of the CRT 
securitization framework that also target these difficult-to-measure 
risks, the overall effectiveness adjustment is duplicative and creates 
an unnecessary disincentive for the Enterprises to engage in CRT.
    The vast majority of comments supported FHFA's proposed amendment 
to eliminate the overall effectiveness adjustment from the CRT 
securitization framework. Several commenters contended that the overall 
effectiveness adjustment was redundant and was not analytically 
supported. Commenters also reasoned that the proposed amendment 
produces a CRT treatment that better recognizes the risk reduction in 
CRT through improved CRT economics, provides appropriate incentives for 
the transfer of credit risk, and that even after removing the overall 
effectiveness adjustment, the capital relief provided by the framework 
is conservative. One commenter maintained that the overall 
effectiveness adjustment can be removed without sacrificing the 
Enterprises' safety and soundness. Multiple commenters suggested that 
the elimination of the overall effectiveness adjustment would encourage 
the Enterprises to disperse credit risk among investors rather than 
retaining that risk where taxpayers are ultimately liable, and that the 
proposed amendment would facilitate the Enterprises to carry out their 
mission throughout the economic cycle.
    Several commenters supported keeping the overall effectiveness 
adjustment. These commenters contended that the proposal to eliminate 
the overall effectiveness adjustment further weakens the financial 
resilience of the Enterprises to withstand future credit losses that 
may occur during an economic stress and that FHFA should keep the 
adjustment because it accounts for differences in loss-absorbing 
capacity between CRT and equity capital. Several other commenters 
recommended FHFA keep the overall effectiveness adjustment in the CRT 
securitization framework, but their support for this aspect of the 
framework was conditional on either eliminating the CRT risk weight 
floor or making substantive reductions to the proposed risk weight 
floor.
    The final rule adopts the removal of the overall effectiveness 
adjustment as proposed. In consideration of the public comments on the 
proposed rule, FHFA continues to believe that the overall effectiveness 
adjustment should be eliminated from the risk-based capital 
requirements for retained CRT exposures. FHFA believes that the risk 
weight floor, loss timing effectiveness adjustment, counterparty 
effectiveness adjustments, and CRT operational criteria, including 
FHFA's authority to review and approve CRT transactions as effective in 
transferring credit risk, sufficiently protect the Enterprises from the 
potential safety and soundness risks posed by CRT.

VI. 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 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 0.66112295e 
(0.002619948*t). The Enterprises use the long-term HPI trend 
as the basis for calculating the single-family countercyclical 
adjustment. As published in the ERCF, 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 (d)(3)(iv) to correct a typographical error.
     In Sec.  1240.43(b)(1), the term ``KG'' would be replaced 
to correct a typographical error.
     In Sec.  1240.44 we correct the following typographical 
errors:
    [cir] In paragraph (b)(9)(i)(C), the term ``(LTFUPB%)'';
    [cir] In paragraph (b)(9)(i)(D), the term ``LTF%'';
    [cir] In paragraph (b)(9)(ii), the term ``LTF%'';
    [cir] In paragraph (b)(9)(ii)(B), the term ``(CRTF15%)'';
    [cir] In paragraph (b)(9)(ii)(C), the term ``(CRT80NotF15%)'';
    [cir] In paragraph (b)(9)(ii)(E)(2)(i), the equation would be 
revised to correct typographical errors in the names of two variables 
within the equation;
    [cir] In paragraph (b)(9)(ii)(E)(2)(iii), the term ``LTF%'';
    [cir] In paragraph (c) introductory text, the term ``RW%'';
    [cir] In paragraph (c)(1), the term ``AggEL%'';
    [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 final rule adopts the ERCF technical corrections as proposed.

[[Page 14770]]

VII. 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 final 
rule contains no such collection of information requiring OMB approval 
under the PRA. Therefore, no information has been submitted to OMB for 
review.

VIII. 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 final 
rule under the Regulatory Flexibility Act. The General Counsel of FHFA 
certifies that the final rule will not have a significant economic 
impact on a substantial number of small entities because the final rule 
is applicable only to the Enterprises, which are not small entities for 
purposes of the Regulatory Flexibility Act.

IX. Congressional Review Act

    In accordance with the Congressional Review Act (5 U.S.C. 801 et 
seq.), FHFA has determined that this final rule is a major rule and has 
verified this determination with the Office of Information and 
Regulatory Affairs of OMB.

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 
amends 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 a new 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. Revise Sec.  1240.11(a)(6) 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 ``0.66112295e (0.002619948*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 (d)(3)(iv).


Sec.  1240.43   [Amended]

0
6. Amend Sec.  1240.43(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 ``(LTFUPB%)'' and 
adding the term ``(LTFUPB)'' in its place;
0
b. In paragraph (b)(9)(i)(D), 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), 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 the term ``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);
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) * * *

[[Page 14771]]

[GRAPHIC] [TIFF OMITTED] TR16MR22.001

* * * * *
    (d) * * *
    [GRAPHIC] [TIFF OMITTED] TR16MR22.002
    
* * * * *
    (f) * * *
    (2) Inputs--(i) Enterprise adjusted exposure. The adjusted exposure 
(EAE) of an Enterprise with respect to a retained CRT exposure is as 
follows:
[GRAPHIC] [TIFF OMITTED] TR16MR22.003

    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] TR16MR22.004
    
* * * * *
    (h) * * *

[[Page 14772]]

[GRAPHIC] [TIFF OMITTED] TR16MR22.005

* * * * *

Sandra L. Thompson,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2022-04529 Filed 3-15-22; 8:45 am]
BILLING CODE 8070-01-P