WASHINGTON – The Financial Stability Oversight Council (Council) today voted unanimously to approve a statement summarizing its review of the secondary mortgage market. The Council’s review focused in particular on the activities of Fannie Mae and Freddie Mac (the Enterprises). In conducting the review, the Council applied the framework for an activities-based approach described in the interpretive guidance on nonbank financial company determinations issued by the Council in December 2019.
The Council’s review noted the central role the Enterprises continue to play in the national housing finance markets, and found any distress at the Enterprises that affected their secondary mortgage market activities, including their ability to perform their guarantee and other obligations on their mortgage-backed securities (MBS) and other liabilities, could pose a risk to financial stability, if risks are not properly mitigated. The Council’s review also considered whether the regulatory framework of the Federal Housing Finance Agency (FHFA) would adequately mitigate this potential risk posed by the Enterprises.
The FHFA’s recent capital proposal was central to the Council’s analysis; the Council considered whether the proposed capital rule is appropriately sized and structured, given the Enterprises’ risks and their key role in the housing finance system, and also whether the proposed capital rule promotes stability in the broader housing finance system. The Council presents the following key findings:
The Council encourages FHFA and other regulatory agencies to coordinate and take other appropriate action to avoid market distortions that could increase risks to financial stability by generally taking consistent approaches to the capital requirements and other regulation of similar risks across market participants, consistent with the business models and missions of their regulated entities.
The Council also encourages FHFA to consider the relative merits of alternative approaches for more dynamically calibrating the capital buffers. The capital buffers should be tailored to mitigate the potential risks to financial stability and otherwise ensure that the Enterprises have sufficient capital to absorb losses during periods of severe stress and remain viable going concerns, while balancing other policy objectives.
Finally, the Council encourages FHFA to ensure high-quality capital by implementing regulatory capital definitions that are similar to those in the U.S. banking framework. The Council also encourages FHFA to require the Enterprises to be sufficiently capitalized to remain viable as going concerns during and after a severe economic downturn.