The mortgage industry is responding with mixed reviews to the Federal Housing Finance Agency‘s Final Capital Rule for mortgage giants Fannie Mae and Freddie Mac, which it released on Wednesday.

The final rule mandates that the GSEs maintain tier 1 capital in excess of 4% to avoid restrictions on capital distributions and discretionary bonuses. According to the FHFA, the increase in required capital is due in part to the increase in the enterprises’ adjusted total assets to $6.6 trillion.

Mike Calabria, FHFA director, said the organization is confident that the Final Capital Rule puts Fannie Mae and Freddie Mac on a path toward a sound financial footing, and is another milestone necessary for responsibly ending the conservatorships.

On Thursday, Mortgage Bankers Association President and CEO Bob Broeksmit said the MBA appreciates the time and effort given to reviewing comments from industry stakeholders and regulatory agencies prior to its finalization, but is disappointed in several aspects of the rule.

“Despite the concerns we expressed that the high levels of required capital in the proposed rule would adversely impact the cost and availability of credit for consumers, the final rule actually increases the total capital requirement for the GSEs,” said Broeksmit.

“While FHFA took modest steps to recognize the value of credit risk transfers, these steps appear to be more than offset by other changes that increase the risk-based capital requirements relative to FHFA’s earlier proposal. We also remain concerned that the high leverage ratio requirements will be binding more frequently than is appropriate and will further contribute to negative impacts on consumers,” Broeksmit said.

“Given that this rule will affect both the cost and availability of mortgage credit for borrowers, we believe FHFA should conduct a quantitative impact study to determine the full impact of the rule. QIS reports have been critical to properly calibrating other major capital rules undertaken by the banking agencies and should be a part of this process, given the impact on the $11 trillion housing finance market,” Broeksmit continued.

The National Association of Federally-Insured Credit Unions applauded Calabria’s commitment to “building a robust regulatory capital framework” for the GSEs as the FHFA attempts to reform the housing finance system.

And Fannie Mae CEO Hugh Frater agreed. According to Frater, FHFA’s capital rule is an important step in ensuring the housing finance system can serve the needs of homeowners, renters, and the broader mortgage market for generations to come.

“The new capital standards set the stage for a responsible end to the conservatorship and a future recapitalization of Fannie Mae,” Frater said.

Investment firm Compass Point Research and Trading pointed out several parts of the Final Capital Rule that will have the most consequential results.

For example, using data from Q2 2020, Compass said the GSEs would need to hold $283.4 billion in capital compared to $262.7 billion under the proposed rule released earlier this year. According to Compass, the $20.7B increase from the proposal to final rule is due to the risk floors being increased from 15% to 20%, changes to the single-family grids and multipliers, and the home price countercyclical trigger.

As far as how the rule affects GSE conservatorship, Compass said finalizing the rule is a positive step toward eventually amending the Preferred Stock Purchase Agreement (PSPA).

A spokesperson for the FHFA told American Banker on Wednesday, “The next step, according to senior FHFA officials, is for the FHFA and the Treasury Department to amend the preferred stock purchase agreements, which lay out the government’s ownership in Fannie and Freddie.”

On the flip side, Compass said while the final rule provides a modicum of CRT relief, that benefit is likely offset by more cumbersome single-family risk grids/multipliers and an increase in the risk weight floor.

“In the simplest terms, the considerable capital requirements will negatively impact the earnings return profile of the GSEs, which in turn could make raising equity capital more difficult,” Compass said in a release. “For a typical business facing this headwind, raising prices would be a viable option.

“The GSEs, however, are not normal businesses and raising G-Fees is politically unpalatable and therefore incredibly difficult. Any curtailment of mortgage credit availability via pricing changes will be met with opposition from the mortgage industry, Congressional Democrats, and the incoming administration,” Compass said.

Managing director Bose George, at Keefe, Bruyette & Woods (KBW), agreed with Compass that the increase in capital relief for CRT transactions was a positive product of the rule, but some flaws in the final rule may prove more difficult for the GSEs in the long run.

George estimates that run-rate earnings for the two GSEs is around $20 billion annualized, so building required capital through retained earnings would be challenging given the long timeline. He also noted that this level of required capital makes the process of recapitalization more challenging since it would be difficult to generate an attractive ROE without raising guarantee fees.

“George believes that the new administration would be very opposed to higher guarantee fees as a mechanism to increase earnings and attract capital, since this would translate to higher mortgage rates for borrowers. While Mark Calabria’s term goes until 2024, the Supreme Court will be hearing a case that challenges the constitutionality of the structure of the FHFA,” a KBW release said.

The Center for Responsible Lending worries that those who will experience the greatest impact from the rule will be lower-wealth families and families of color.

“The FHFA’s new capital rule places the burden of future catastrophic risk on the backs of these hardworking families and will unnecessarily raise the cost of mortgages for all borrowers, resulting in limited credit availability,” said CRL Executive Vice President Nikitra Bailey. “The rule pushes homeownership farther away from families of color long denied mortgage credit access.”

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