Introduction and Executive Summary
Thank you for the opportunity to comment on the Federal Housing Finance Agency’s (FHFA’s) re-proposed rule on capital requirements for Fannie Mae and Freddie Mac (the governmentsponsored enterprises, or GSEs).

In our view, the proposed rule erroneously treats the GSEs as banks and therefore requires banklike capital. This leads to gratuitously high capital levels that run directly contrary to the GSEs’ charter mission to promote access to mortgage credit to underserved borrowers, to serve a countercyclical role in the mortgage market, and to FHFA’s duty to reasonably support the safety and soundness of the GSEs and U.S. housing finance system.

The proposed rule’s approach would unnecessarily increase costs and reduce mortgage credit availability, with an acute impact on low- to moderate-income families and families of color. It would do this directly, by pricing out of the GSE channel many borrowers with lower credit scores and higher loan-to-value (LTV) ratios, and indirectly, by pricing out higher credit score and lower LTV borrowers that generate much of the current system’s cross subsidy to make its loans more affordable.

The rule would hamstring the GSEs in fulfilling their countercyclical mission in a crisis. It would shrink the conventional market’s footprint, likely shifting significant volume to FHA, and leave more of the mortgage market subject to the swings of portfolio and PLS markets, which tend to dry up quickly in times of stress, including the financial crisis of 2008.

And the rule would not reduce risk to the overall housing finance system, but rather simply redistribute and concentrate it. By removing the GSEs’ incentive to distribute their credit risk, the rule would lead to more risk being held at the GSEs despite their smaller market share.

Moreover, consistent with the GSEs’ mission, FHFA should consider the impact on low-to moderate-income borrowers and borrowers of color. We support FHFA’s attempt to provide a more level application of capital requirements across risk levels to reduce the relative penalty that lower-wealth families pay for large-scale and systemic events over which they have no control and from which they disproportionately suffer. However, the combination of excessive overall capital requirements and a minimum that is too high for low-risk loans in the proposed rule would result in net increases in costs for lower-wealth families. As described in section IV, the proposal would have a disproportionate impact on people of color, intensifying pricing disparities and making mortgage credit more expensive and less available, thereby aggravating the racial wealth gap.

The proposed rule is thus critically flawed as written. We recommend that FHFA:

  1. Refrain from adopting bank capital rules for the GSEs;
  2. Count a portion of guarantee fee revenue as capital for risk-based capital requirements;
  3. Treat properly discounted CRT as a component of required credit risk capital;
  4. Eliminate the punitive stability capital buffer and the countercyclical capital buffer;
  5. Lower the leverage ratio to the alternative proposal from the 2018 proposed rule of 1.5% for trust assets and 4% for retained portfolio; and
  6. Regulate the GSEs as utilities to promote affordability and more equitably serve low-to moderate borrowers and families of color, as well as to promote safety and soundness of the GSEs.

Read the full comment.