FHFA implements fee but may revisit capital framework that includes it

The Federal Housing Finance Agency is moving ahead with a controversial new charge for now, but it’s simultaneously exploring alternatives that may include reconsideration of the Enterprise Regulatory Capital Framework.

Trade groups have expressed concern that the upfront 50 basis-point fee aimed at addressing counterparty risk undermines uniform mortgage-backed securities intended to minimize differences between the two government-sponsored enterprises contributing to them.

“FHFA will be exploring alternatives to ensure the long-term viability of UMBS, including conducting a review of the ERCF in the near-term to ensure that the risks of commingled securities are appropriately reflected,” the agency said in a statement issued Thursday evening.

The statement raised questions related to whether the agency would consider yet another revision to the capital framework, which serves as a cornerstone in efforts to rebuild the finances of two government-sponsored enterprises that play a key role in the U.S. mortgage market.

The two GSEs that the agency oversees, Fannie Mae and Freddie Mac, have been in government conservatorship since their finances collapsed amid the Great Recession’s housing crash, and for some time, the FHFA has been working to recapitalize them so they can exit.

The Trump administration in particular pushed hard for an exit and played a key role in drawing up the current framework, which trade groups said disincentivized the use of some other previously implemented programs like UMBS, and securities used to share credit risk with private investors.

Recently confirmed FHFA Director Sandra Thompson has said she will continue to position Fannie Mae and Freddie Mac for an exit, but she has showed a willingness to modify the framework, which she did to restore incentives for the use of credit risk transfers.

The agency will have to weigh whether or not another modification of the capital framework is in order as it considers the potentially adverse effect it could have on UMBS, which represent a subset of the large to-be-announced market that U.S. mortgage financing largely relies on.

The fee isn’t expected to immediately hurt the market because the Federal Reserve is currently supporting it. However, the Fed is on track to slowly unwind its involvement, at which point the fact that investors could pay less for UMBS due to the loss of their fungibility advantage could become more of an issue.

Views have been mixed as to whether the disincentives to certain programs in the capital framework were aimed at politically undermining certain prior-administration initiatives, rooted in different interpretations of risks the instruments involved have, or part of efforts to remove some of the GSEs’ advantages and put them on a more even playing field with the private market.

Some trade group officials said they had difficulty engaging the FHFA’s prior administration on their concerns relative to the capital treatment of commingled securities, so the agency’s more recent willingness to discuss the issue has been a hopeful sign the issue will be addressed in some way.

“It was originally flagged in a lot of people’s comment letters, but they did whatever they wanted on many issues at the time, this being one of them,” said Michael Bright, CEO of the Structured Finance Association. “Now I think they’re more in dialogue with the market to understand what the implications are.”