[Federal Register Volume 83, Number 137 (Tuesday, July 17, 2018)]
[Proposed Rules]
[Pages 33312-33430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-14255]



[[Page 33311]]

Vol. 83

Tuesday,

No. 137

July 17, 2018

Part II





Federal Housing Finance Agency





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12 CFR Parts 1206 and 1240





 Department of Housing and Urban Development





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Office of Federal Housing Enterprise Oversight





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12 CFR Part 1750





Enterprise Capital Requirements; Proposed Rule

Federal Register / Vol. 83 , No. 137 / Tuesday, July 17, 2018 / 
Proposed Rules

[[Page 33312]]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Parts 1206 and 1240

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1750

RIN 2590-AA95


Enterprise Capital Requirements

AGENCY: Federal Housing Finance Agency; Office of Federal Housing 
Enterprise Oversight

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is 
proposing a new regulatory capital framework for the Federal National 
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage 
Corporation (Freddie Mac) (collectively, the Enterprises), which 
includes a new framework for risk-based capital requirements and two 
alternatives for an updated minimum leverage capital requirement. The 
risk-based framework would provide a granular assessment of credit risk 
specific to different mortgage loan categories, as well as market risk, 
operational risk, and going-concern buffer components. The proposed 
rule would maintain the statutory definitions of core capital and total 
capital.
    FHFA has suspended the Enterprises' capital requirements since the 
beginning of conservatorship, and FHFA plans to continue this 
suspension while the Enterprises remain in conservatorship. Despite 
this suspension, FHFA believes it is appropriate to update the Agency's 
standards on Enterprise capital requirements to provide transparency to 
all stakeholders about FHFA's supervisory view on this topic. In 
addition, while the Enterprises are in conservatorship, FHFA will 
expect Fannie Mae and Freddie Mac to use assumptions about capital 
described in the rule's risk-based capital requirements in making 
pricing and other business decisions. Feedback on this proposed rule 
will also inform FHFA's views in evaluating Enterprise business 
decisions while the Enterprises remain in conservatorship.

DATES: Comments must be received on or before September 17, 2018.

ADDRESSES: You may submit your comments on the proposed rule, 
identified by regulatory information number (RIN) 2590-AA95, by any one 
of the following methods:
    <bullet> Agency Website: www.fhfa.gov/open-for-comment-or-input.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by email 
to FHFA at <a href="/cdn-cgi/l/email-protection#75271012361a1818101b010635131d13145b121a03"><span class="__cf_email__" data-cfemail="bfeddad8fcd0d2d2dad1cbccffd9d7d9de91d8d0c9">[email protected]</span></a> to ensure timely receipt by FHFA. 
Include the following information in the subject line of your 
submission: Comments/RIN 2590-AA95.
    <bullet> Hand Delivered/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA95, 
Federal Housing Finance Agency, Eighth Floor, 400 Seventh Street SW, 
Washington, DC 20219. Deliver the package at the Seventh Street 
entrance Guard Desk, First Floor, on business days between 9 a.m. and 5 
p.m.
    <bullet> U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/RIN 2590-AA95, Federal 
Housing Finance Agency, Eighth Floor, 400 Seventh Street SW, 
Washington, DC 20219. Please note that all mail sent to FHFA via U.S. 
Mail is routed through a national irradiation facility, a process that 
may delay delivery by approximately two weeks. For any time-sensitive 
correspondence, please plan accordingly.

FOR FURTHER INFORMATION CONTACT: Naa Awaa Tagoe, Senior Associate 
Director, Office of Financial Analysis, Modeling & Simulations, (202) 
649-3140, <a href="/cdn-cgi/l/email-protection#8cc2ededcdfbededa2d8edebe3e9cceae4eaeda2ebe3fa"><span class="__cf_email__" data-cfemail="0a446b6b4b7d6b6b245e6b6d656f4a6c626c6b246d657c">[email protected]</span></a>; Andrew Varrieur, Associate Director, 
Office of Financial Analysis, Modeling & Simulations, (202) 649-3141, 
<a href="/cdn-cgi/l/email-protection#da9bb4bea8bfadf48cbba8a8b3bfafa89abcb2bcbbf4bdb5ac"><span class="__cf_email__" data-cfemail="21604f455344560f774053534844545361474947400f464e57">[email protected]</span></a>; or Miriam Smolen, Associate General Counsel, 
Office of General Counsel, (202) 649-3182, <a href="/cdn-cgi/l/email-protection#6825011a010905463b0507040d06280e000e09460f071e"><span class="__cf_email__" data-cfemail="86cbeff4efe7eba8d5ebe9eae3e8c6e0eee0e7a8e1e9f0">[email protected]</span></a>. 
These are not toll-free numbers. The mailing address is: Federal 
Housing Finance Agency, 400 Seventh Street SW, Washington, DC 20219. 
The telephone number for the Telecommunications Device for the Hearing 
Impaired is (800) 877-8339.

SUPPLEMENTARY INFORMATION: 

Comments

    FHFA invites comments on all aspects of the proposed rule and will 
take all comments into consideration before issuing a final rule. 
Copies of all comments will be posted without change, and will include 
any personal information you provide such as your name, address, email 
address, and telephone number, on the FHFA website at http://www.fhfa.gov. In addition, copies of all comments received will be 
available for examination by the public through the electronic 
rulemaking docket for this proposed rule also located on the FHFA 
website.

Table of Contents

I. Introduction
    A. Rationale for Proposing a Capital Rule
    B. Overview of the Proposed Rule
    C. Legislative Authority and History
    D. The Enterprises' Pre-Conservatorship Business and the 
Financial Crisis
    E. Enterprises' Business Model and Changes in Conservatorship
    F. Comparison of Enterprises and Large Depository Institutions
    G. Dodd-Frank Act Stress Test Process
    H. Important Considerations for the Proposed Rule
II. The Proposed Rule
    A. Components of the Proposed Rule
    B. Impact of the Proposed Rule
    C. Risk-Based Capital Requirements
    1. Overall Approach
    2. Operational Risk
    3. Going-Concern Buffer
    4. Single-Family Whole Loans, Guarantees, and Related Securities
    a. Credit Risk
    b. Credit Risk Transfer
    c. Market Risk
    d. Operational Risk
    e. Going-Concern Buffer
    f. Impact
    5. Private-Label Securities
    6. Multifamily Whole Loans, Guarantees, and Related Securities
    a. Credit Risk
    b. Credit Risk Transfer
    c. Market Risk
    d. Operational Risk
    e. Going-Concern Buffer
    f. Impact
    7. Commercial Mortgage-Backed Securities
    8. Other Assets and Guarantees
    9. Unassigned Activities
    D. Minimum Leverage Capital Requirements
    E. Definition of Capital
    F. Temporary Adjustments to Minimum Leverage and Risk-Based 
Capital Requirements
III. Paperwork Reduction Act
IV. Regulatory Flexibility Act

Table Reference for Section II

Table 1: Fannie Mae's Capital Requirement Comparison to Peak 
Cumulative Capital Losses
Table 2: Fannie Mae's Single-Family Credit Risk Capital Requirement 
Comparison to Lifetime Single-Family Credit Losses
Table 3: Freddie Mac's Capital Requirement Comparison to Peak 
Cumulative Capital Losses
Table 4: Freddie Mac's Single-Family Credit Risk Capital Requirement 
Comparison to Lifetime Single-Family Credit Losses
Table 5: Fannie Mae and Freddie Mac Estimated Risk-Based Capital 
Requirements as of September 30, 2017--by Risk Category
Table 6: Fannie Mae and Freddie Mac Combined Estimated Risk-Based 
Capital

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Requirements for the Enterprises as of September 30, 2017--by Asset 
Category
Table 7: Fannie Mae and Freddie Mac Estimated Minimum Leverage 
Capital Requirement Alternatives as of September 30, 2017
Table 8: Operational Risk Capital Requirement
Table 9: Single-Family New Originations Base Credit Risk Capital (in 
bps)
Table 10: Single-Family Performing Seasoned Loans Base Credit Risk 
Capital (in bps)
Table 11: Single-Family Non-Modified Re-Performing Loans Base Credit 
Risk Capital (in bps)
Table 12: Single-Family Modified Re-Performing Loans Base Credit 
Risk Capital (in bps)
Table 13: Single-Family Non-Performing Loans Base Credit Risk 
Capital (in bps)
Table 14: Single-Family Risk Multipliers
Table 15: CE Multipliers for New Originations, Performing Seasoned 
Loans, and RPLs When MI Is Non-Cancellable
Table 16: CE Multipliers for New Originations, Performing Seasoned, 
and Non-Modified RPLs When MI Is Cancellable
Table 17: CE Multipliers for Modified RPLs With 30-Year Post-Mod 
Amortization When MI Is Cancellable
Table 18: CE Multipliers for Modified RPLs With 40-Year Post-Mod 
Amortization When MI Is Cancellable
Table 19: CE Multipliers for NPLs
Table 20: Counterparty Financial Strength Ratings
Table 21: Parameterization of the Single-Family Counterparty Haircut 
Multipliers
Table 22: Single-Family Counterparty Risk Haircut (CP Haircut) 
Multipliers by Rating, Mortgage Concentration Risk, Segment, and 
Product
Table 23: Fannie Mae and Freddie Mac Combined Estimated Total Risk-
Based Capital Requirements for Single-Family Whole Loans, 
Guarantees, and Related Securities as of September 30, 2017
Table 24: Fannie Mae and Freddie Mac Combined Estimated Credit Risk 
Capital Requirements for Single-Family Whole Loans and Guarantees as 
of September 30, 2017--by Loan Category
Table 25: Fannie Mae and Freddie Mac Combined Estimated Risk-Based 
Capital Requirements for Private-Label Securities as of September 
30, 2017
Table 26: Multifamily FRM Base Credit Risk Capital (in bps)
Table 27: Multifamily ARM Base Credit Risk Capital (in bps)
Table 28: Multifamily Risk Multipliers
Table 29: Multifamily Counterparty Risk Haircut Multipliers by 
Concentration Risk
Table 30: Fannie Mae and Freddie Mac Combined Estimated Total Risk-
Based Capital Requirements for Multifamily Whole Loans, Guarantees, 
and Related Securities as of September 30, 2017
Table 31: Fannie Mae and Freddie Mac Combined Estimated Credit Risk 
Capital Requirements for Multifamily Whole Loans and Guarantees as 
of September 30, 2017--by Loan Category
Table 32: Fannie Mae and Freddie Mac Combined Estimated Risk-Based 
Capital Requirements for Commercial Mortgage-Backed Securities as of 
September 30, 2017
Table 33: Fannie Mae and Freddie Mac Estimated Risk-Based Capital 
Requirements for Deferred Tax Assets Assuming Core Capital Equal to 
Risk-Based Capital Requirement
Table 34: Fannie Mae and Freddie Mac Estimated Risk-Based Capital 
Requirements for Deferred Tax Assets Assuming Core Capital as of 
September 30, 2017
Table 35: Fannie Mae and Freddie Mac Combined Estimated Risk-Based 
Capital Requirements for Other Assets as of September 30, 2017
Table 36: Bifurcated Minimum Leverage Capital Requirement 
Alternative Comparison to the Proposed Risk-Based Capital 
Requirements

I. Introduction

A. Rationale for Proposing a Capital Rule

    FHFA's predecessor agency, the Office of Federal Housing Enterprise 
Oversight (OFHEO), last adopted capital rules for Fannie Mae and 
Freddie Mac in 2001. The Housing and Economic Recovery Act of 2008 
(HERA) gave FHFA greater authority to determine capital standards for 
the Enterprises. Each Enterprise was placed into conservatorship 
shortly after the enactment of HERA. FHFA suspended the statutory 
capital classifications and regulatory capital requirements during 
conservatorship, due to the Enterprises having entered the control of 
the conservator. Today, the Senior Preferred Stock Purchase Agreements 
(PSPAs) with the U.S. Department of the Treasury (Treasury Department) 
limit each Enterprise's ability to hold capital.
    Prior to proposing this rule, FHFA has taken other steps to assess 
adequate capital assumptions for the Enterprises while they operate in 
conservatorship. Despite the Enterprises' limited ability to hold 
capital, FHFA identified the need to develop an aligned risk 
measurement framework to better evaluate each Enterprise's business 
decisions while they are in conservatorship. FHFA's purpose in pursuing 
this effort was to ensure that the Enterprises make prudent business 
decisions when pricing transactions and managing their books of 
business. The initial framework developed as a result of this effort is 
called the Conservatorship Capital Framework (CCF) and was put into 
place in 2017 under FHFA's oversight as conservator.
    The CCF is the foundation for FHFA's proposed capital regulation. 
Although the capital requirements in the rule would need to be 
suspended after adoption of a final rule because the Enterprises remain 
in conservatorship and are supported by the Treasury Department through 
the PSPAs which limit their ability to retain capital, the updated rule 
would achieve several objectives. The proposed rule serves to 
transparently communicate FHFA's views as a financial regulator about 
capital adequacy for the Enterprises under current statutory language 
and authorities. The fact that FHFA has suspended the Enterprises' 
capital requirements does not eliminate FHFA's responsibility, as a 
prudential regulator, to articulate a view about Enterprise capital 
requirements. It also prepares the Agency to modify the capital 
standards for future housing finance entities, even if they are 
significantly different from the Enterprises, upon completion of 
housing finance reform by Congress and the Administration, instead of 
starting from the outdated OFHEO rules. In addition, publication of 
this proposed rule will enable the public to provide input on these 
important issues.
    While the Enterprises currently operate under the PSPAs with the 
Treasury Department, the proposed rule does not take the PSPAs into 
account. The proposed risk-based capital requirements are designed to 
establish the necessary minimum capital for the Enterprises to continue 
operating after a stress event comparable to the recent financial 
crisis. In a reformed housing finance system, policymakers would need 
to determine whether to retain support like that provided by the PSPAs 
for future housing finance entities.
    In proposing this rule, FHFA is not attempting to take a position 
on housing finance reform. Similarly, this proposed rule is not a step 
towards recapitalizing the Enterprises and administratively releasing 
them from conservatorship. FHFA's position continues to be that it is 
the role of Congress and the Administration to determine the future of 
housing finance reform and what role, if any, the Enterprises should 
play in that system.
    Publication of this proposed rule will assist with FHFA's 
administration of the conservatorships of Fannie Mae and Freddie Mac by 
potentially refining the CCF. As with other proposed rules, the 
rulemaking provides the public with an opportunity to comment on the 
proposed capital requirements. As FHFA reviews the public comments and 
works to finalize the rule, the Agency expects to adopt material and 
appropriate changes into the existing CCF.

[[Page 33314]]

B. Overview of the Proposed Rule

    FHFA is proposing a regulatory capital framework for the 
Enterprises that would implement two components: A new framework for 
risk-based capital requirements and a revised minimum leverage capital 
requirement specified as a percentage of total assets and off-balance 
sheet guarantees. FHFA's proposed rule is based on a capital framework 
that is generally consistent with the regulatory capital framework for 
large banks, but reflects differences in the charters, business 
operations, and risk profiles of the Enterprises. The proposed rule 
uses concepts from the Basel framework with appropriate modifications 
for the Enterprises. FHFA's proposed framework recognizes that the 
Enterprises are monoline businesses with assets and guarantees heavily 
concentrated in residential mortgages with risk profiles that differ 
from large diversified banks.
    In order to fulfill their charter responsibilities of providing 
stability to the secondary mortgage market, the Enterprises must remain 
as functioning entities both during and after a period of severe 
financial stress. To achieve this objective, the proposed risk-based 
capital framework targets a risk-invariant minimum capital level after 
surviving a stress event, referred to as the going-concern buffer.
    The Enterprises' assets and operations are exposed to different 
types of risks. The proposed risk-based capital framework would address 
the key exposures by explicitly covering credit risk, including 
counterparty risk, as well as market risk and operational risk. The 
proposed framework would define the requirements by risk factor for 
each key group of the Enterprises' assets and guarantees.
    In establishing risk-based capital requirements and updating the 
minimum leverage requirement, FHFA is seeking to ensure that the two 
sets of requirements complement one another. For the risk-based capital 
requirements, FHFA is proposing a comprehensive framework that provides 
a detailed assessment of the Enterprises' risk of incurring unexpected 
losses. Instead of applying the Basel standardized approach of a 50 
percent risk weight for all mortgage assets regardless of different 
product features or terms, FHFA's proposed risk-based capital 
requirements would use a series of approaches, which include base 
grids, risk multipliers, assessments of counterparty risk, and capital 
relief due to credit risk transfer transactions, to produce tailored 
capital requirements for mortgage loans, guarantees, and securities. 
These asset-specific capital requirements would then be applied across 
each Enterprise's book of business to produce total risk-based capital 
requirements.
    By differentiating between the types and features of mortgage 
assets, guarantees, and securities purchased by the Enterprises, FHFA 
believes the proposed risk-based capital requirements would represent a 
substantial step forward in articulating the relative risk levels of 
mortgage loans and quantifying the associated capital requirements for 
the Enterprises.
    In coordination with the proposed risk-based capital requirements, 
FHFA is also proposing two alternative minimum leverage capital 
requirements. Each of these alternatives would update the existing 
minimum leverage requirements established by statute for the 
Enterprises. Under the first alternative, the ``2.5 percent 
alternative,'' the Enterprises would be required to hold capital equal 
to 2.5 percent of total assets (as determined in accordance with 
generally accepted accounting principles (GAAP)) and off-balance sheet 
guarantees related to securitization activities, regardless of the risk 
characteristics of the assets and guarantees or how they are held on 
the Enterprises' balance sheets. Under the second alternative, the 
``bifurcated alternative,'' the Enterprises would be required to hold 
capital equal to 1.5 percent of trust assets and 4 percent of non-trust 
assets, where trust assets are defined as Fannie Mae mortgage-backed 
securities or Freddie Mac participation certificates held by third 
parties and off-balance sheet guarantees related to securitization 
activities, and non-trust assets are defined as total assets as 
determined in accordance with GAAP plus off-balance sheet guarantees 
related to securitization activities minus trust assets. The 
Enterprises' retained portfolios would be included in non-trust assets. 
In proposing these two alternatives, FHFA seeks to obtain feedback 
about how to balance the following considerations.
    On the one hand, FHFA seeks to establish a minimum leverage 
requirement that would serve as a backstop capital requirement to guard 
against the potential that the risk-based capital requirements would be 
underestimated or would become too low in the future following periods 
of sustained, strong economic conditions. A meaningful minimum leverage 
requirement would also guard against the risk that the risk-based 
capital measure significantly underestimates necessary capital levels. 
An underestimation of capital could occur for different reasons, 
including the potential for model estimation error, the possibility 
that loans perform differently than similar loans did in the historical 
periods used to estimate the models, the emergence of new products that 
are inadequately capitalized because of a lack of historical 
performance data as occurred during the financial crisis, and the 
possibility that the proposed risk-based capital approach would 
overestimate the amount of capital relief attributed to CRT 
transactions. A leverage backstop would also protect against a reduced 
risk-based capital measure during times of overly aggressive house 
price appreciation and low unemployment, which would result in lower 
capital requirements and the release of capital when loan-to-value 
ratios fall. In the absence of a meaningful minimum leverage capital 
requirement, aggressively low risk-based capital requirements could 
result in the Enterprises facing difficulty raising capital in 
worsening economic conditions when capital is most needed. A leverage 
backstop would also mitigate the risk of rapid deleveraging for 
institutions that depend on short-term funding, though, as discussed 
herein, this rationale applies more to large depository institutions 
than to the Enterprises. Lastly, a leverage backstop would provide a 
floor beyond the proposed going-concern buffer and operational risk 
capital requirement for the amount of capital released as a result of 
credit risk transfer transactions.
    On the other hand, FHFA also seeks to avoid setting a minimum 
leverage requirement that is too high and would regularly eclipse the 
risk-based capital requirements, which could have adverse consequences. 
Because leverage requirements generally require firms to hold the same 
amount of capital for any type of asset irrespective of the asset's 
risk profile, a binding leverage requirement could incent firms to hold 
riskier assets on their balance sheets. Instead of reducing risk to the 
Enterprises, a high leverage requirement that surpasses risk-based 
capital requirements could encourage the Enterprises to forgo lower-
risk assets in favor of those with higher-risks because the same 
capital requirement would apply for either asset. In addition, a 
binding leverage requirement could lead an Enterprise to reduce or halt 
its CRT transactions. This could occur because the proposed risk-based 
capital requirements provide capital relief for CRT transactions, 
whereas the minimum leverage capital requirements in this proposed rule 
do not provide capital relief for CRT transactions. As a

[[Page 33315]]

result, a binding leverage ratio could reduce an Enterprise's economic 
incentive to engage in these transactions, potentially resulting in 
greater concentration of credit risk at the Enterprise.
    Each of these proposed capital requirements are discussed in 
section II.

C. Legislative Authority and History

    Effective July 30, 2008, HERA created FHFA as a new independent 
agency of the Federal Government. The part of HERA that applies to FHFA 
is the Federal Housing Finance Regulatory Reform Act of 2008,\1\ which 
amended the Federal Housing Enterprises Financial Safety and Soundness 
Act of 1992 (Safety and Soundness Act or statute).\2\ The 1992 statute 
created OFHEO, one of FHFA's predecessor agencies.
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    \1\ Public Law 110-289, Div. A, July 30, 2008, 122 Stat. 2659.
    \2\ Public Law 102-550, Title XIII, October 28, 1992, 106 Stat. 
3941.
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    HERA transferred to FHFA the supervisory and oversight 
responsibilities of OFHEO over Fannie Mae and Freddie Mac. HERA also 
transferred the oversight responsibilities of the Federal Housing 
Finance Board over the Federal Home Loan Banks (Banks) and the Office 
of Finance, which acts as the Banks' fiscal agent, and certain 
functions of the Department of Housing and Urban Development (HUD) with 
respect to the affordable housing mission of the Enterprises. In 
addition to transferring supervisory responsibilities to FHFA, HERA 
gave the Agency greater authority than OFHEO had to determine the 
capital standards for the Enterprises.
1992 Statute and OFHEO Risk-Based Capital Rulemaking
    As originally enacted, the 1992 statute specified a minimum capital 
requirement in the form of a leverage ratio for the Enterprises and a 
highly prescriptive approach to risk-based capital requirements for the 
Enterprises. The statute required that OFHEO establish a risk-based 
capital stress test by regulation such that each Enterprise could 
survive a ten-year period with large credit losses and large movements 
in interest rates. The statute specified two interest rate scenarios, 
with falling and rising rates, and provided the interest rate paths for 
each scenario. The statute set parameters for a benchmark loss 
experience for default and loss severity, but provided OFHEO discretion 
to determine other aspects of the capital test.
    To implement this statutory language, OFHEO developed a risk-based 
capital standard for the Enterprises, and issued a series of Federal 
Register notices to solicit public comment. Initially, the Agency 
issued an Advance Notice of Proposed Rulemaking (ANPR) to seek comment 
on a number of issues related to the rule's development. Those comments 
were considered when OFHEO subsequently developed two Notices of 
Proposed Rulemaking (NPRs). The first NPR contained the methodology for 
identifying the benchmark loss experience and the use of OFHEO's House 
Price Index (HPI). The second NPR proposed the remaining specifications 
of the stress test. OFHEO also issued a notice to give interested 
parties an opportunity to respond to comments received by the Agency 
from the second NPR. OFHEO's Final Rule included consideration of the 
comments received in the first and second NPRs, as well as the reply 
comments.
Suspension of Capital Requirements During Conservatorship and Existing 
Regulatory Capital Requirements
    On September 6, 2008, the Director of FHFA appointed FHFA as the 
conservator for each Enterprise, pursuant to authority in the Safety 
and Soundness Act. Conservatorship is a statutory process intended to 
preserve and conserve the assets of the Enterprises and to put the 
companies in a sound and solvent condition. FHFA suspended the capital 
classifications and the regulatory capital requirements applicable at 
that time, and they remain suspended.\3\
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    \3\ Press Release, ``FHFA Announces Suspension of Capital 
Classifications During Conservatorship,'' Oct. 9, 2008.
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    Although the capital requirements are suspended while the 
Enterprises are in conservatorship, this section reviews the Enterprise 
capital standards in the prior OFHEO rule, which, though suspended, has 
not yet been replaced.\4\ The OFHEO regulations on the Enterprises' 
minimum capital (leverage ratio) and risk-based capital requirements 
would be superseded by this rulemaking.
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    \4\ 12 CFR part 1750.
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    The Enterprises are required by statute to maintain the capital 
necessary to meet certain minimum leverage and risk-based capital 
levels. Under HERA, the Enterprises continue to operate under the 
regulations issued by OFHEO until those regulations are superseded by 
regulations issued by FHFA. The OFHEO rule's minimum leverage and risk-
based capital requirements are applied simultaneously, but are not 
additive. The Enterprises must meet both requirements in order to be 
classified as adequately capitalized.
    If any Enterprise is classified as other than adequately 
capitalized, it triggers a series of prompt corrective actions. Since 
the ability of the Enterprises to obtain adequate capital was fatally 
impaired due to the financial crisis, capital support for the 
Enterprises was provided by the PSPAs with the Treasury Department when 
the Enterprises were put into conservatorship. Accordingly, FHFA 
suspended the capital classifications as well as the OFHEO capital 
regulation.
    The minimum leverage capital requirement specified in the Safety 
and Soundness Act is equal to 2.5 percent of on-balance sheet assets 
and 0.45 percent of off-balance sheet obligations. These levels are 
applied to the retained portfolio and guarantee business, 
respectively.\5\ The statute, today as in 1992, requires the minimum 
leverage capital requirement to be met with core capital, which per the 
statute is composed of outstanding common stock (par value and paid-in 
capital), retained earnings, and outstanding non-cumulative perpetual 
preferred stock.
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    \5\ Due to changes in GAAP after the statute was enacted, 
guaranteed mortgage-backed securities held by third parties are now 
consolidated by each Enterprise onto its balance sheet. However, for 
minimum leverage capital purposes, FHFA has interpreted the statute 
as continuing to apply the 0.45 percent capital requirement to these 
loans. See Regulatory Interpretation 2010-RI-1, Jan. 12, 2010.
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    The statute, as amended by HERA, also requires the Enterprises to 
meet a risk-based capital standard, to be prescribed by FHFA by 
regulation. The OFHEO capital rule contains a stress test, which is to 
be applied to each Enterprise's book of business. As prescribed by the 
1992 statute, the stress test is designed such that each Enterprise 
could survive a ten-year period with large credit losses and large 
movements in interest rates. There are two interest rate scenarios, 
with falling and rising rates, and interest rate paths for each 
scenario. The test has parameters for a benchmark loss experience for 
default and loss severity, and uses the House Price Index produced by 
OFHEO (which FHFA now produces).
    The statute, both in 1992 and today, requires the risk-based 
capital requirement to be met with total capital, which is the sum of 
core capital and a general allowance for foreclosure losses, plus 
``[a]ny other amounts from sources of funds available to absorb losses 
incurred by the enterprise, that the Director by regulation determines 
are appropriate to include in determining

[[Page 33316]]

total capital'' (a determination that OFHEO never made).
    The statute, both in 1992 and today, defines a critical capital 
level, which is the amount of core capital below which an Enterprise is 
classified as critically undercapitalized. The critical capital level 
is 1.25 percent of on-balance sheet assets (retained portfolio) and 
0.25 percent of off-balance sheet obligations (guarantee business).
    Under the statute, both in 1992 and today, an Enterprise is 
considered adequately capitalized when core capital meets, or exceeds, 
the minimum capital requirement and total capital meets, or exceeds, 
the risk-based capital requirement. An Enterprise is considered 
undercapitalized if it fails the risk-based requirement, but meets the 
minimum capital requirement. It is significantly undercapitalized when 
it fails both the minimum and risk-based capital requirements, but 
still has enough critical capital. It becomes critically 
undercapitalized when it fails both the minimum and risk-based capital 
requirements, as well as the critical capital requirement.
    If an Enterprise becomes undercapitalized or significantly 
undercapitalized, under the prompt corrective action framework in the 
statute the Enterprise is subject to heightened supervision. This 
includes being required to submit a capital restoration plan, and 
having restrictions imposed on capital distributions and asset growth. 
A significantly undercapitalized Enterprise must also improve 
management through a change in the board of directors or executive 
officers. If an Enterprise becomes critically undercapitalized, then 
the Enterprise may be placed in conservatorship or receivership.
HERA Amendments on Enterprise Capital Requirements
    FHFA's broader capital regulation authority provided by the 
amendments made by HERA creates an opportunity for FHFA to develop a 
new risk-based capital standard and an increased minimum leverage 
requirement. FHFA's authority to establish risk-based capital 
requirements was amended under HERA by removing the specific stress 
test requirements that had been mandated for OFHEO's rulemaking and 
providing FHFA with the authority to establish risk-based capital 
requirements ``to ensure that the enterprises operate in a safe and 
sound manner, maintaining sufficient capital and reserves to support 
the risks that arise in the operations and management of the 
enterprises.'' \6\ While HERA did not change the minimum leverage ratio 
levels specified in the statute, the legislation provided FHFA with 
authority to increase the minimum leverage requirement above those 
levels as necessary,\7\ and to temporarily increase the minimum capital 
level for a regulated entity.\8\ FHFA issued a final regulation to 
implement the temporary increase authority in 2011.\9\ Additionally, as 
amended by HERA, the statute provides FHFA with the authority to 
establish capital or reserve requirements for specific products and 
activities as deemed appropriate by the Agency.\10\ HERA also enhanced 
the Safety and Soundness Act's prompt-corrective-action provisions and 
added the agency's conservatorship and receivership authorities.
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    \6\ 12 U.S.C. 4611(a)(1).
    \7\ 12 U.S.C. 4612(c).
    \8\ 12 U.S.C. 4612(d), implemented at 12 CFR part 1225.
    \9\ 76 FR 11668 (March 3, 2011).
    \10\ 12 U.S.C. 4612(e).
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Dodd-Frank Act Stress Tests
    Section 165 \11\ of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 \12\ (Dodd-Frank Act) required the capital 
adequacy stress testing of large financial companies with assets over 
$10 billion that are supervised by a federal regulator. FHFA issued 
regulations to implement this requirement.\13\ However, the Dodd-Frank 
Act Stress Test is a reporting requirement, not a capital requirement. 
The purpose of the test is to assist in the evaluation of capital 
sufficiency, but it does not set any capital requirements for the 
Enterprises.
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    \11\ 12 U.S.C. 5365(i). The stress testing requirements of the 
Dodd-Frank Act have been adjusted by Title IV of the Economic 
Growth, Regulatory Relief, and Consumer Protection Act, Public Law 
115-174, May 24, 2018, 132 Stat. 1356, to, among other things, 
reflect new asset thresholds and to reduce from 3 to 2 the number of 
testing scenarios. The effect, if any, of the new requirements will 
be considered and accounted for in any final rule FHFA issues.
    \12\ Public Law 111-203, July 21, 2010, 124 Stat. 1376.
    \13\ 12 CFR part 1238.
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D. The Enterprises' Pre-Conservatorship Business and the Financial 
Crisis

Pre-Conservatorship Business
    The Enterprises' business model of supporting single-family and 
multifamily housing consists of both a guarantee business and a 
portfolio business. In the portfolio business, the Enterprises issue 
debt and invest the proceeds in whole loans and mortgage-backed 
securities. The mortgage securities held in the retained portfolio were 
traditionally the Enterprises' own guaranteed mortgage-backed 
securities. In the years leading up to the crisis, however, the 
Enterprises became active participants in the market for private-label 
mortgage securities, which exposed the Enterprises to significant fair 
value losses.
    The Enterprises earned net interest income on the difference 
between rates on the mortgage securities (interest income) and the debt 
costs (interest expense) on their retained portfolio business. The net 
interest income was at risk since longer-term assets were funded by 
shorter-term debt. The Enterprises managed this duration mismatch using 
interest-rate swaps and ``swaptions'' in the derivatives market. By 
holding leveraged positions in mortgage securities and funding them 
with shorter-term debt, the Enterprises took on substantial market 
risks, in addition to supporting core business functions. Sources of 
this market risk include the risk of loss from changes in interest 
rates and the basis risk associated with imperfect hedging.
    The Enterprises also used the retained portfolios to hold whole 
loans that could not be easily securitized, such as certain affordable 
loans and loans being reworked through loss mitigation. In addition, 
the retained portfolios were used to support the cash window for 
smaller lenders. This use of the retained portfolio supported core 
business functions and helped the Enterprises to fulfill their mission. 
However, during the pre-conservatorship period, the purchase of 
mortgage securities dominated the portfolio business.
    In the guarantee business, private lenders participated in the 
mortgage-backed security swap program and cash window program. Through 
these programs, private lenders originated loans according to 
Enterprises' standards, and either exchanged those loans for securities 
that were guaranteed by either Enterprise, or sold loans directly to 
the Enterprises for cash. When lenders in the swap program received 
guaranteed mortgage-backed securities, they often sold those securities 
to replenish funds, enabling the lenders to make more loans. When 
smaller lenders sold their loans to the Enterprises for cash, the price 
they received was the market price for the loans less an implied 
guarantee fee. The Enterprises were able to quickly aggregate the cash 
window purchases from multiple smaller lenders and issue the guaranteed 
securities with a larger pool size directly. In addition, loans 
purchased through Freddie Mac's cash window or Fannie Mae's whole loan 
conduit (collectively referred to

[[Page 33317]]

henceforth as the cash window) noted above were aggregated and later 
securitized. In both the swap and cash programs, the Enterprises 
assumed the credit risk on the loans in exchange for a guarantee fee. 
The lenders earned income through originating and servicing loans, and 
selling MBS they received from the Enterprises; and private investors 
assumed the market risk from price changes driven by movements in 
interest rates.
Growth in Subprime and Other High Risk Loans
    In the years leading up to the financial crisis, competition in the 
primary mortgage market for revenue and market share led mortgage 
lenders to relax underwriting standards and originate riskier mortgages 
to less creditworthy borrowers. Many of these loans were packaged into 
subprime and ``Alt-A'' private-label securities that were sold without 
backing from the Enterprises. Investor appetite for these loans enabled 
lenders to lower standards for underwriting, including credit scores, 
which increased the potential pool of borrowers and helped to drive up 
house prices. Consequently, subprime mortgages were given to borrowers 
with lower credit scores and low down payments.
    In addition, Alt-A loans were increasingly offered to borrowers 
considered riskier than ``A'' or prime paper and less risky than 
subprime. Alt-A mortgages were characterized by less than the full 
documentation by the lender of a borrower's income and assets, which 
markedly increased the credit risk and fueled speculation. These high-
risk loans often had features that made it increasingly difficult for 
borrowers to repay the loans, including low teaser rates that would 
reset, balloon payments, prepayment penalties, interest-only periods, 
and negative amortization. Weak underwriting standards during this 
period often included inflated appraised values, which compounded the 
problems. In addition, many loans had ``risk-layering'' of more than 
one higher risk attribute, significantly increasing credit exposures.
    The private-label securities were divided into tranches with 
different terms and credit risk attributes. Prior to 2003, the 
Enterprises maintained relatively high underwriting standards. However, 
as the Enterprises faced declining market shares of the total mortgage 
market with the growth of the private-label market, the Enterprises 
sought to increase business revenue by buying significant amounts of 
the AAA-rated tranches of private-label subprime and Alt-A securities 
for their retained portfolios. In addition, the Enterprises guaranteed 
increasingly larger amounts of Alt-A whole mortgage loans with non-
traditional credit standards from lenders through bulk sales, outside 
of the normal business standards for the guarantee business.
2007-2008 Financial Crisis
    The financial crisis began in 2007 with stresses in the subprime 
and Alt-A mortgage market. The crisis grew to other financial sectors 
in the United States and globally. Several large financial firms failed 
and others had to be supported through government intervention. After 
the crisis, the Dodd-Frank Act was enacted in the United States, and 
the Basel III capital standards were adopted globally to promote 
financial stability.
    In the build-up to the crisis, growth in subprime and Alt-A lending 
drove house prices increasingly higher. The overvaluation of non-
traditional mortgages was based on the assumption that house prices 
would continue to rise. However, as the market for those loans began to 
weaken, house prices started to decline nationwide, further 
exacerbating the problems and spreading stress to markets beyond the 
housing sector. By September 2008 when the Enterprises entered 
conservatorship, the average U.S. house price had declined by over 20 
percent from its mid-2006 peak. Many borrowers were faced with 
underwater mortgages such that the unpaid balances of the loans 
exceeded the value of the homes. The economic stress affected not only 
the subprime and Alt-A mortgages in the Enterprises' guarantee book, 
but also the mortgages in the guarantee book that had been approved 
under more traditional mortgage underwriting standards.
    The financial crisis had a major impact on the value of the 
private-label securities held by the Enterprises in their retained 
portfolios. From 2002 to 2008, Fannie Mae purchased $240 billion of 
subprime and Alt-A private-label single-family mortgage securities. 
From 2006 to 2008, Freddie Mac purchased $160 billion of these 
securities.\14\ When the financial crisis hit, the Enterprises suffered 
sharp declines in the value of these securities, due to weakening 
collateral and credit rating downgrades.
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    \14\ See FHFA's Report to Congress for private-label security 
holdings, serious delinquency rate, and credit loss data.
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    The SFAS 157 accounting standard issued in 2006 for fair value 
accounting required that tradable assets such as mortgage securities 
that were purchased with the intent to resell in either a short time 
frame (trading securities) or in a longer time frame (available-for-
sale securities) be valued according to their current market value 
rather than historic cost or some future expected value. When the 
market for private-label securities collapsed, the value losses had a 
major financial effect on the holders of these securities. Upon 
entering conservatorship, the Enterprises ceased buying both subprime 
and Alt-A securities, and began to wind down those positions.
    In addition to the private-label security losses in the portfolio, 
the guarantee book experienced severe stress from the financial crisis. 
Fannie Mae's single-family serious delinquency rate rose from 0.65 
percent in 2006 to 2.42 percent in 2008, peaking at 5.38 percent in 
2009. Subsequently, the delinquency rate fell below 2.00 percent by 
2014 and to 1.24 percent at the end of 2017. Freddie Mac's delinquency 
rate rose from 0.42 percent in 2006 to 1.83 percent in 2008, peaking at 
3.98 percent in 2009. At the end of 2017, ten years after the start of 
the financial crisis, Freddie Mac's delinquency rate had fallen to 1.08 
percent.
    The serious delinquency rates from the financial crisis translated 
into high credit losses for the Enterprises and a sharp increase in 
real estate owned properties (REO) \15\--properties acquired through 
foreclosure. Fannie Mae's credit losses as a percent of its guarantee 
book increased from 0.02 percent in 2006 to a peak of 0.77 percent in 
2010. REO increased from 0.09 percent in 2006 to a peak of 0.53 percent 
in 2010. Freddie Mac experienced a similar loss and REO experience. Its 
credit losses grew from 0.01 percent in 2006 to a peak of 0.72 percent 
in 2010, and REO grew from 0.04 percent to 0.36 percent over this 
period.
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    \15\ When a borrower is unable to repay a mortgage, and a loan 
goes through the foreclosure process, the lender takes possession of 
the property that was pledged as collateral. When the property is 
conveyed to an Enterprise, it becomes real estate owned (REO) on the 
Enterprise's book.
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    As asset prices fell and other large financial firms failed, it 
became increasingly difficult for the Enterprises to issue debt to fund 
their retained portfolios, to raise new capital to cover the mark-to-
market losses from private-label securities, and to build reserves for 
projected credit losses from credit guarantees. In the financial 
crisis, it became apparent that the Enterprises were not adequately 
capitalized to absorb these types of shocks.
    In response to the substantial deterioration in the housing market 
that

[[Page 33318]]

left Fannie Mae and Freddie Mac unable to fulfill their mission without 
government intervention, FHFA used its conservatorship authority in the 
newly amended Safety and Soundness Act. On September 6, 2008, the 
Director of FHFA appointed FHFA as the conservator for each Enterprise 
to preserve and conserve the assets of the Enterprises and to put the 
companies in a sound and solvent condition. The goals of 
conservatorship are to restore confidence in the Enterprises, enhance 
the Enterprises' abilities to fulfill their missions, and mitigate the 
systemic risk that contributed directly to the instability during the 
financial crisis.\16\
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    \16\ https://www.fhfa.gov/Conservatorship.
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    As conservator, FHFA directs the operations of each Enterprise. The 
Agency has empowered the Enterprises' boards of directors and senior 
management to manage most day-to-day operations of the Enterprises, so 
that the companies can continue to support the mortgage markets without 
interruption. The approach that FHFA uses to exercise control and 
manage the conservatorships of Fannie Mae and Freddie Mac is discussed 
in the next section.
    While the Enterprises are in conservatorship, the Treasury 
Department provides Fannie Mae and Freddie Mac with financial support 
through PSPAs. This support is unprecedented, and was necessary for the 
Enterprises to be able to meet their outstanding obligations and to 
continue to provide liquidity to the mortgage market. The initial PSPAs 
in September 2008 included an initial issuance to the Treasury 
Department of preferred stock with a liquidation preference of $1 
billion each in Fannie Mae and Freddie Mac and warrants for a 79.9 
percent common equity stake in each Enterprise.
    Quarterly draws were designed to allow each Enterprise to maintain 
positive net worth. The maximum permitted amount was set at $100 
billion for each Enterprise. The dividend rate on senior preferred 
stock purchased by the Treasury Department was set at 10 percent. In 
addition, the PSPAs provided for a ``periodic commitment fee'' to 
compensate the Treasury Department for its continuing commitment to 
purchase further senior preferred stock, up to a maximum commitment 
amount, as necessary to maintain the solvency of the Enterprises. (The 
Treasury Department regularly waived that fee, and in the August 2012 
third amendment to the PSPAs, the fee was indefinitely suspended for so 
long as the ``net worth sweep'' established by that amendment remained 
in effect.) The PSPAs also included a requirement for each Enterprise 
to reduce the size of the retained portfolio by at least 10 percent 
each year, but allowed a $250 billion portfolio per Enterprise to 
support core business functions. The first amendment to the agreement 
in May 2009 doubled the maximum cumulative draw per Enterprise to $200 
billion, and a second amendment in December 2009 replaced the maximum 
draw amount with a formulaic approach.
    The third amendment to the agreement in August 2012 replaced the 10 
percent dividend and the periodic commitment fee with a variable 
structure, under which the net income of each Enterprise in excess of a 
small capital buffer (the ``Applicable Capital Reserve Amount'') is 
swept to the Treasury Department. In many quarters, the payment equals 
quarterly net profits. With this amendment, all of the Enterprises' 
earnings are used to benefit taxpayers. The third amendment also 
provided for the uniform reduction of the Applicable Capital Reserve 
Amount from $3 billion to $0 at the end of 2017. In addition, the third 
amendment increased the rate of reduction in the size of the retained 
portfolios. Each Enterprise must reduce its portfolio by 15 percent per 
year, which is a faster reduction rate than the previous 10 percent 
annual reduction. This reduces the maximum retained portfolios to $250 
billion by the end of 2018.
    In December 2017, the PSPAs were revised to restore the Applicable 
Capital Reserve Amount to $3 billion. FHFA considers this capital 
reserve amount to be sufficient to cover normal fluctuations in income 
in the course of each Enterprise's business.\17\
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    \17\ https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-from-FHFA-Director-Melvin-L-Watt-on-Capital-Reserve-for-Fannie-Mae-and-Freddie-Mac.aspx.
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E. Enterprises' Business Model and Changes in Conservatorship

    FHFA uses four key approaches to manage the conservatorships of 
Fannie Mae and Freddie Mac. First, it establishes the overall strategic 
direction for the Enterprises in the Strategic Plan for the 
Conservatorships and an annual scorecard. Next, within the scope of the 
Strategic Plan and annual scorecard, FHFA authorizes the board of 
directors and senior management of each Enterprise to carry out the 
day-to-day operations of the companies. Third, for certain actions 
which FHFA has carved out as requiring advance approval by the Agency, 
it reviews and considers those requests. Finally, FHFA oversees and 
monitors the Enterprises' activities.
    FHFA's conservatorship strategic plan has three goals: (1) To 
maintain foreclosure prevention activities and new credit availability 
in a safe and sound manner, (2) to reduce taxpayer risk through 
increasing the role of private capital, and (3) to build a new 
securitization infrastructure. The annual scorecards provide more 
specific direction for meeting these goals. FHFA reports to the public 
on its yearly activities through a number of reports, including an 
Annual Report to Congress, scorecard progress reports, credit risk 
transfer progress reports, and updates on the implementation of the 
common securitization platform and single security.
    As discussed earlier, the Enterprises' business model before 
conservatorship of supporting single-family and multifamily housing 
traditionally consisted of both a guarantee business and a portfolio 
business. In the guarantee business, lenders may exchange loans for a 
guaranteed mortgage-backed security, which may then be sold by the 
lender into the secondary market to recoup funds to make more loans, or 
they may sell loans directly to an Enterprise through the cash window. 
The Enterprises purchase loans through the cash window from multiple 
smaller-volume lenders to aggregate and later securitize and guarantee. 
Loans purchased through the cash window are held in portfolio until 
they are securitized and become part of the guarantee business. The 
Enterprises charge a guarantee fee to cover the costs of providing the 
guarantee. In the portfolio business, the Enterprises invest in assets 
such as whole loans or mortgage-backed securities, and funds those 
purchases with debt issuances.
    Consistent with the terms of the PSPAs with the Treasury 
Department, the portfolio business has been reduced substantially in 
size during conservatorship, with the guarantee business assuming a 
much larger role. While the portfolio business involves both credit and 
market risk, in the guarantee business the Enterprises assume the 
credit risk and the market risk is borne by private investors in the 
guaranteed mortgage-backed securities. In conservatorship, consistent 
with direction provided by FHFA in its strategic plan and annual 
scorecard, the Enterprises have developed programs to transfer a 
significant portion of the credit risk in the single-family guarantee 
business to the private sector.
    In addition to reducing the size of the retained portfolios, the 
Enterprises have also strengthened underwriting and

[[Page 33319]]

eligibility standards, aligned certain business processes, and worked 
toward implementing a common securitization platform.
Guarantee Fees
    The Enterprises charge fees to lenders in return for guaranteeing 
the credit risk on mortgage-backed securities. In response to the 
housing crisis and in conservatorship, the Enterprises have made a 
number of changes to these guarantee fees. As a result, the average 
single-family guarantee fee increased from 22 basis points in 2007 to 
57 basis points in 2016.
    In 2008, to better align fees with credit risk, the Enterprises 
increased ongoing guarantee fees and added two new upfront fees: A fee 
based on the combination of a borrower's credit score and loan-to-value 
ratio, and a 25 basis point adverse market charge. In late 2008 through 
2011, the Enterprises gradually raised fees and further refined their 
upfront fee schedules. In late 2011, as mandated by the Temporary 
Payroll Tax Cut Continuation Act of 2011,\18\ FHFA directed the 
Enterprises to increase guarantee fees by 10 basis points on average to 
offset the cost to the Treasury Department of a temporary payroll tax 
cut enacted by Congress.
---------------------------------------------------------------------------

    \18\ Public Law 112-78, Dec. 23, 2011, 125 Stat. 1280.
---------------------------------------------------------------------------

    In 2012, FHFA directed the Enterprises to raise fees by an 
additional 10 basis points on average to better compensate taxpayers 
for the Enterprises' credit risk. Fees were raised in a manner that 
helped eliminate volume-based discounts and thereby provide a level 
playing field for lenders of all sizes.
    In 2013, FHFA announced another round of fee increases but 
subsequently suspended the implementation of those changes in order to 
perform a comprehensive review of the Enterprises' guarantee fees. 
After completing that review in 2015, FHFA directed the Enterprises to 
implement certain adjustments. These adjustments included the 
elimination of the adverse market charge in all markets and targeted 
increases for specific loan groups. The set of fee changes was 
approximately revenue neutral with little to no impact for most 
borrowers.
    In 2016, in response to findings in its ongoing quarterly guarantee 
fee reviews, FHFA established minimum guarantee fees by product type to 
help ensure the continued safety and soundness of the Enterprises.
Retained Portfolio
    Under the PSPAs with the Treasury Department and direction from 
FHFA, the unpaid balance of each Enterprise's mortgage portfolio is 
subject to a cap that decreases by 15 percent each year until the cap 
reaches $250 billion. The Enterprises have made significant progress on 
reducing their retained portfolios, and toward using the portfolios to 
support core business activities rather than as a source of investment 
income. The Enterprises have reduced their retained portfolios by over 
60 percent since 2009, and both Enterprises are ahead of schedule in 
meeting the 2018 maximum portfolio limits.
    Most of the portfolio reduction has resulted from prepayments and 
regular amortization of mortgages. The Enterprises have also sold less-
liquid assets, such as private-label securities and non-performing and 
re-performing loans, in order to transfer risk to private investors. 
The Enterprises also securitized certain re-performing mortgages held 
on their books and sold those securities into the market. Fannie Mae's 
holdings of Fannie Mae-guaranteed securities fell from $229 billion at 
the end of 2008 to $49 billion in 2017, and holdings of other 
securities fell from $133 billion to $5 billion over the same period. 
Freddie Mac's retained portfolio experienced similar declines, as 
holdings of Freddie Mac-guaranteed securities fell from $425 billion in 
2008 to $132 billion in 2017, and other mortgage securities fell from 
$269 billion to $14 billion over the same period.
    The Enterprises' retained portfolios now primarily support the core 
business activities of aggregating loans from single-family and 
multifamily lenders to facilitate securitization, and holding 
delinquent loans in portfolio to facilitate loan modifications in order 
to keep borrowers in their homes and reduce Enterprise losses. The 
portfolios also support certain affordable products that cannot be 
easily securitized. In addition, the Enterprises' retained portfolios 
may be used to support underserved markets under Duty-to-Serve Plans 
that the Enterprises have begun to implement in 2018.
Credit Risk Transfer
    The Enterprises have significantly expanded their practice of 
transferring credit risk to the private sector in recent years. Credit 
risk transfer (CRT) has long been a part of each Enterprise's 
multifamily business. In 2016, the Enterprises transferred a portion of 
credit risk to private investors on over 90 percent of their combined 
multifamily acquisition volume. In 2013, the Enterprises began to 
develop programs to transfer a portion of the credit risk on their 
single-family new-acquisition businesses. The purpose is to reduce the 
risk to the Enterprises and taxpayers of future borrower defaults where 
it is economically sensible to do so.
    FHFA assesses the Enterprises' CRT programs using certain core 
principles. The transactions must transfer a meaningful amount of 
credit risk to private investors to reduce taxpayer risk, and the cost 
of the credit risk transfers must be economically sensible in relation 
to the cost of the Enterprises self-insuring the risk. In addition, the 
transactions may not interfere with the Enterprises' core business, 
including the ability of borrowers to access credit. The CRT programs 
are intended to attract a broad investor base, be scalable, and 
incorporate a regular program of issuances. In transactions where 
credit risk may not be not fully collateralized, the program 
counterparties must be financially strong and able to fulfill their 
commitments even in adverse market conditions.
    Loans targeted for single-family CRT include fixed-rate mortgages 
with loan-to-value ratios greater than 60 percent and original term 
greater than 20 years. These loans carry the majority of the 
Enterprises' credit risk exposure. Loans targeted for credit risk 
transfer have grown from 42 percent of total Enterprise acquisitions in 
2013 to 62 percent of acquisitions in the first half of 2017. The 
Enterprises continue to assume the full credit risk on less risky loans 
with lower loan-to-value ratios and shorter terms, as well as on 
certain higher risk legacy loans where the economics do not favor CRT 
transactions. The Enterprises also transfer risk on loans outside of 
the targeted loan population.
    The single-family CRT programs, implemented since 2013, supplement 
the more traditional credit enhancements required by the Enterprises' 
charters. The charters require loans with loan-to-value ratios above 80 
percent to have loan-level credit enhancement, most often obtained 
through private mortgage insurance. From 2013 through the first half of 
2017, the Enterprises transferred a portion of the credit risk through 
their single-family CRT programs on $1.8 trillion of mortgages with a 
combined risk in force of $61 billion, or 3.4 percent of the credit 
risk. During the same period, primary mortgage insurers also covered a 
portion of credit risk on $837 billion of unpaid principal

[[Page 33320]]

balances (UPB) through traditional loan-level insurance.
    Since 2013, the CRT programs have become a core part of the single-
family business. In the second quarter of 2017, the Enterprises 
transferred risk on $213 billion of mortgages, with risk in force of $6 
billion or nearly 3 percent of risk. Debt issuances accounted for 70 
percent of the risk in force, insurance and reinsurance transactions 
accounted for 25 percent, and lender risk sharing accounted for the 
remaining 5 percent. Front-end reinsurance transactions increased from 
2 percent of the risk in force in the first quarter of 2017 to 4 
percent in the second quarter. In the first half of 2017, loans 
targeted for CRT represented 62 percent of the Enterprises' single-
family loan production.
    Enterprise debt issuances have been the primary risk transfer 
vehicle to date. Fannie Mae uses a structure called Connecticut Avenue 
Securities (CAS), while Freddie Mac issues Structured Agency Credit 
Risk (STACR) securities. CAS and STACR have been designed to track the 
performance of a reference pool of loans previously securitized in 
Enterprise guaranteed MBS. These debt transactions are fully 
collateralized, since investors pay for the notes in full and absorb 
credit losses through a reduction in the principal due on the 
underlying notes. The Enterprises typically retain the first 50 basis 
points of expected losses in most transactions because purchasing 
protection for this portion may not offer economic benefits. While debt 
transactions have been the primary CRT method, the Enterprises have 
worked to broaden their investor base through other structures, and to 
compare executions across different structures and market environments.
    Insurance and reinsurance transactions are considered part of the 
Enterprises' CRT programs and are separate from the Enterprises' 
charter requirements for loans with loan-to-value ratios above 80 
percent. These transactions generally involve pool-level policies that 
cover a specified amount of credit risk for a large pool of loans. 
Fannie Mae uses a structure called Credit Insurance Risk Transfer 
(CIRT), while Freddie Mac uses the Agency Credit Insurance Structure 
(ACIS). These structures are partially collateralized, and the 
Enterprises distribute risk among a group of highly-rated insurers and 
reinsurers to reduce counterparty and correlation risk.
    In senior/subordinate transactions, an Enterprise sells a group of 
mortgages to a trust that securitizes the cash flows into different 
bond tranches. Prior to 2017, super conforming loans that would 
otherwise have backed Freddie Mac mortgage-backed securities were used 
as collateral in Freddie Mac's single-family senior/subordinate 
transactions called Whole Loan Securities (WLS). The subordinate and 
mezzanine tranches, which are not guaranteed, absorb the expected and 
unexpected credit losses. The senior bonds, which were guaranteed by 
the Enterprise, have historically traded at a slight discount to 
comparable Freddie Mac mortgage-backed securities. In order to provide 
a more scalable and economic solution, in 2017 Freddie Mac introduced a 
revised structure to its WLS, called STACR Securitized Participation 
Interests (SPI). This new structure allows for the issuance of 
mortgage-backed securities rather than guaranteed senior certificates 
to improve the pricing execution in the credit risk transfer. The STACR 
SPI trust will continue to issue unguaranteed credit certificates as 
subordinate and mezzanine tranches. In contrast to synthetic CRT 
structures, the senior/subordinate structure is eligible for purchase 
by real estate investment trusts (REITs).
    Another form of single-family risk structure is lender front-end 
CRT, where the credit risk is transferred prior to or simultaneous with 
the Enterprise loan acquisition. Lender front-end risk transfer can be 
structured through the issuance of securities with the lender holding 
the credit risk by retaining the securities, or by selling the 
securities to credit risk investors. Alternatively, in traditional 
lender recourse transactions, the lender may forgo securities issuance 
and simply retain the credit risk. The lender will often, but not 
always, fully collateralize its obligation. While the Enterprise 
charter requirement for loan-level credit enhancement is typically 
through private mortgage insurance, the charters allow the Enterprises 
to accept lender recourse as an alternative, so lender retention of 
credit risk has been used to a lesser extent in the past. However, this 
lender recourse has not always been fully collateralized.
    While the newest forms of single-family CRT started in 2013, risk 
sharing has been an integral part of the Enterprises' multifamily 
business for many years. Fannie Mae's primary multifamily risk-transfer 
program exists through its Delegated Underwriting and Servicing (DUS). 
In this program, lenders typically share up to one-third of the credit 
losses on a pro-rata basis with the Enterprises. In an effort to 
broaden its program offerings, Fannie Mae completed the first non-DUS 
CRT in 2016 when it transferred a portion of its credit risk to the 
reinsurance industry. Freddie Mac's multifamily risk-transfer program 
generally exists through its K-Deal program in which Freddie Mac 
purchases loans that are put into diversified pools, and placed into 
multiclass securities for sale to private investors. The subordinate 
and mezzanine bond tranches are not guaranteed by Freddie Mac. Instead, 
the subordinate or ``B-piece'' holders are in the first-loss position 
in the event of a mortgage default. If losses exceed the ``B-piece'' 
level, holders of the mezzanine bond tranche assume the additional 
losses. The subordinate and mezzanine tranches are sized such that 
virtually all credit risk is transferred to the investors in those 
securities. The senior bonds comprise the remainder of the K-Deal and 
are guaranteed by Freddie Mac.
Underwriting Standards and Qualified Mortgages
    The Enterprises are required to emphasize sound underwriting 
practices in their purchase guidelines. Since entering conservatorship, 
the Enterprises have continued to refine automated underwriting systems 
to better assess risk, reduce risk layering, improve the use of 
compensating factors, and enable access to credit in a safe and sound 
manner. The Enterprises launched the Uniform Mortgage Data Program to 
standardize data in the mortgage industry to help improve loan quality 
and mortgage risk management. The Enterprises also revamped the 
Representation and Warranty Framework to reduce lender uncertainty 
around requirements to repurchase loans from the Enterprises and to 
support access to credit.
    In the Dodd-Frank Act, Congress adopted ability-to-repay 
requirements for nearly all closed-end residential mortgage loans. 
Congress also established a presumption of compliance with these 
requirements for a certain category of loans called Qualified Mortgages 
(QM). The Consumer Financial Protection Bureau (CFPB) adopted an 
ability-to-repay rule to implement these provisions.
    A loan is generally considered a Qualified Mortgage if: (1) The 
points and fees do not exceed 3 percent of the loan amount, (2) the 
term does not exceed 30 years, (3) the loan is fully amortizing with no 
negative amortization, interest-only, or balloon features, and (4) the 
borrower's debt-to-income (DTI) ratio does not exceed 43 percent. CFPB 
also defined a special transitional class of QM loans that are not 
subject to the 43 percent DTI limit if they are eligible for sale to 
either Enterprise.

[[Page 33321]]

    Before the CFPB rule became final, the Enterprises had already 
improved underwriting standards and eliminated purchases of the higher 
risk products such as negative amortization and interest-only loans. In 
2013, after the CFPB rule became final, FHFA directed each Enterprise 
to acquire only loans that meet the points and fees, term and 
amortization requirements of the CFPB's rule for Qualified Mortgages.
Loss Mitigation
    FHFA has also worked with the Enterprises to develop effective loss 
mitigation programs to minimize losses and enable borrowers to avoid 
foreclosure whenever possible. The Enterprises aligned their loss 
mitigation standards and developed updated loan modification and 
streamlined refinance products. The Enterprises are also pursuing 
efforts to stabilize distressed neighborhoods through the Neighborhood 
Stabilization Initiative. Better underwriting standards, improved loss 
mitigation, and an improving economy have resulted in the Enterprises' 
serious delinquency rates falling to their lowest level since the 
Enterprises entered into conservatorship in 2008.\19\
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    \19\ Fannie Mae's single-family serious delinquency rate fell 
from 2.42 percent at the end of 2008 to 1.24 percent at the end of 
2017. Freddie Mac's single-family serious delinquency rate fell from 
1.83 percent to 1.08 percent over the same period.
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Common Securitization Platform and Single Security
    During conservatorship, the Enterprises have worked to build a new 
single-family securitization infrastructure. This includes development 
of a common securitization platform (CSP) and a single Enterprise 
mortgage-backed security. Fannie Mae and Freddie Mac established Common 
Securitization Solutions, LLC (CSS) as a jointly-owned company to 
develop and operate the platform. The platform will replace some of the 
proprietary systems used by the Enterprises to securitize mortgages and 
perform the back office functions.
    In 2015, FHFA announced a two-part process for the CSP and single 
security. Release 1, which was implemented in 2016, uses the CSP to 
issue Freddie Mac's existing single-class securities. Release 2, the 
implementation of which is planned for the second quarter of 2019, will 
enable the issuance of the single security called the Uniform Mortgage 
Backed Security (UMBS) through the CSP. The single security initiative 
will increase the liquidity of the TBA market for newly issued 
mortgage-backed securities and will eliminate the differences in 
pricing between Fannie Mae and Freddie Mac securities.
Governance and Supervision
    When FHFA placed the Enterprises into conservatorship, it replaced 
most members of the boards of directors and many senior managers. 
Through conservatorship and regular supervisory oversight, the Agency 
required the Enterprises to improve risk management, update legacy 
systems, and improve data management. As part of its supervision 
function, FHFA issues advisory bulletins, which communicate FHFA's 
supervisory expectations to the Enterprises on specific supervisory 
matters and topics. In addition, through its supervision program, 
FHFA's on-site examiners conduct supervisory activities to ensure safe 
and sound operations of the Enterprises. These supervisory activities 
include the examination of the Enterprises to determine whether they 
comply with their own policies and procedures and regulatory and 
statutory requirements, and whether they comply with FHFA directives 
and meet the expectations set in FHFA's advisory bulletins.

F. Comparison of Enterprises and Large Depository Institutions

    FHFA has reviewed and used the regulatory capital standards 
applicable to commercial banks as a point of comparison in developing 
the proposed capital requirements for the Enterprises. In conducting 
this evaluation, it was important for FHFA to consider both 
similarities and differences in the Enterprise and bank business 
models. This section reviews capital requirements for depository 
institutions and then discusses the differences in Enterprise and bank 
business models.
Bank Capital Requirements
Basel Accords
    The Basel Accords set the international framework for bank capital 
requirements. The initial framework, Basel I, was replaced by Basel II, 
which was in place during the financial crisis. After the financial 
crisis, regulators adopted standards consistent with Basel III. Each 
country has a different way of applying the Basel standards to meet 
their national legal framework. The Federal Reserve Board (Board), 
Office of the Comptroller of the Currency, and Federal Deposit 
Insurance Corporation have federal regulatory and supervisory 
jurisdiction over banks in the United States.
    The Basel Accords have evolved over time. The 1988 Basel Accord, 
also known as Basel I, was implemented by the Group of Ten (G-10) 
countries in 1992. In Basel I, credit risk was addressed by using 
simple ratios, there was little attention given to market risk, and no 
provision was made for operational risk. The Basel II update was 
initially published in 2004 to make the capital calculation more risk 
sensitive. Basel II had three pillars: Risk-based capital requirements, 
supervisory review, and market discipline. For the risk-based capital 
requirements under Basel II, credit risk, market risk, and operational 
risk were all quantified based on data, and credit risk could be 
quantified using either the standardized approach or internal ratings 
based (IRB) approach. Under the supervisory review pillar, Basel II 
provided a framework for supervisory review of systemic, concentration, 
and liquidity risk among others. Under the market discipline pillar, 
Basel II included a set of disclosure requirements to allow market 
participants to better understand an institution's capital adequacy.
    When the U.S. banking regulators issued the final Basel II rules in 
late 2007 and in 2008, the regulators required each bank to follow the 
set of rules that was the most conservative for the bank. The largest 
banks were required to use the internal ratings based approach, while 
the smaller banks were given a choice between using the standardized 
approach or the internal ratings based approach.
    Basel III was developed in response to the financial crisis and was 
agreed to by Basel members in 2010-11. Basel III strengthened the 
requirements in Basel II and introduced bank liquidity requirements to 
reduce the risk of a run on a bank. Basel III also added capital 
buffers as extra capital cushions on top of regulatory capital 
minimums, to absorb unexpected shocks. Basel III is being phased in 
through 2019.
U.S. Risk-Based and Leverage Capital Requirements for Banks
    Under current regulations implemented by U.S. regulators to align 
with Basel III, U.S. banks must meet certain leverage and risk-based 
capital requirements to be considered adequately capitalized. These 
capital adequacy standards protect deposit holders and the stability of 
the financial system. Two types of capital are measured: Tier 1 and 
Tier 2. Tier 1 capital comprises common stock, retained earnings, non-
cumulative perpetual preferred stock, and accumulated other 
comprehensive income (AOCI). Common equity Tier 1 capital excludes 
cumulative preferred stock. Tier 2 capital is supplementary

[[Page 33322]]

capital consisting of items such as, but not limited to, cumulative 
preferred stock, subordinated debt, and certain reserves that provide 
less protection.
    Banks must also meet certain risk-based capital ratios and leverage 
ratios under existing regulations. As part of the risk-based capital 
standard for credit risk, the capital ratio is the ratio of capital to 
risk-weighted assets (RWA). Basel allows banks to choose between two 
methods for calculating their capital requirement for credit risk, and 
U.S. regulators have implemented both methods under existing 
regulations: The standardized approach and the internal ratings based 
approach. Under the standardized approach, regulators require use of 
prescribed risk weights for every type of exposure to determine the 
credit risk RWA amount. Mortgages have a risk weight of 50 percent 
under the standardized approach, regardless of the loan-to-value ratio, 
credit score, and other risk attributes. The largest banks in the U.S. 
are required to use the internal ratings based (IRB) approach to 
determine the risk weights of asset classes. In the IRB approach, the 
capital charge for a mortgage varies based on the risk attributes of 
the specific mortgage loan using the credit model and loss experience 
of the bank. However, when calculating minimum capital requirements, 
under the Dodd-Frank Act's Collins Amendment large U.S. banks must 
compute their risk-weighted assets using both a standardized approach 
and the advanced approach, and must use the higher of these two numbers 
when computing pre-stress risk-based capital ratios. Because the 
standardized approach often results in a higher ratio, the Collins 
Amendment effectively makes the standardized approach the binding 
requirement for large U.S. banks, and serves to place all banks, 
regardless of size, on equal footing in terms of minimum risk-based 
capital requirements. In contrast to the risk-based capital ratios, the 
leverage ratios compare capital to assets without any weighting for 
risk.
Prompt Corrective Action Framework
    The Federal Deposit Insurance Act requires insured depository 
institutions and federal banking regulators to take prompt corrective 
action to resolve capital deficiencies as defined under the prompt 
corrective action framework.\20\ To be considered well capitalized, 
banks must have a total risk-based capital ratio of 10 percent, Tier 1 
risk-based capital ratio of 8 percent, common equity Tier 1 risk-based 
capital ratio of 6.5 percent, and Tier 1 leverage ratio of 5 percent. 
To be considered adequately capitalized, banks must have a total risk-
based capital ratio of 8 percent, Tier 1 risk-based capital ratio of 6 
percent, common equity Tier 1 risk-based capital ratio of 4.5 percent, 
and Tier 1 leverage ratio of 4 percent. Lower levels of capital result 
in a bank being classified as undercapitalized, significantly 
undercapitalized, or critically undercapitalized. At the extreme lower 
end, a bank would be placed into receivership.
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    \20\ 12 CFR 324.403.
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    The banking regulators also mandate three capital buffers relative 
to the risk-based capital ratios: The capital conservation buffer, the 
countercyclical capital buffer, and the global systemically important 
bank (G-SIB) surcharge. Banks must meet applicable buffers to avoid 
restrictions on capital distributions.
    The capital conservation buffer requires banks to maintain each of 
the three risk-based capital ratios (Common Equity Tier 1, Tier 1, and 
Total Capital) at levels in excess of 2.5 percent above the minimum 
required levels. The countercyclical capital buffer requires banks to 
maintain an additional amount of excess capital during economic periods 
of non-stress. The countercyclical buffer has a potential range of 0 
percent to 2.5 percent, and is currently set to zero. As it is 
structured, the countercyclical capital buffer functions as an 
extension of the capital conservation buffer. The G-SIB surcharge is 
applied in addition to the capital conservation buffer, but only on the 
largest banks identified as globally systemically important. The G-SIB 
surcharge is based on defined criteria that determine the size of the 
bank's systemic footprint, which represents the risk that the bank 
poses to the global financial system in excess of risk posed by 
financial institutions not subject to the surcharge. The different 
buffers are being phased-in through 2019.
    In addition to the risk-based capital requirement, federal banking 
regulators have also established a 4 percent Tier 1 leverage ratio that 
measures the Tier 1 capital available relative to average consolidated 
assets. This measure does not capitalize off-balance sheet exposures.
    Bank regulatory capital rules also require calculation of a 
supplementary leverage ratio (Tier 1 capital/total leverage exposure) 
for banks that are subject to that requirement starting in January 
2018.\21\ The supplementary leverage ratio is 3 percent of on-balance 
sheet assets and off-balance sheet exposures and applies to those 
banking institutions that must adhere to the advanced approach. In 
addition, those institutions with more than $700 billion in total 
consolidated assets are also subject to the enhanced supplementary 
leverage buffer of an additional 2 percent, totaling 5 percent when 
combined with the supplementary leverage ratio of 3 percent.\22\ Banks 
must meet each of these minimum regulatory capital ratios, as required, 
after making all capital actions included in the capital plan, under 
both the baseline and stress scenarios over the nine-quarter planning 
horizon.\23\
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    \21\ The supplemental leverage ratio includes off-balance sheet 
exposures for large banks.
    \22\ The Federal Reserve Board and the Office of the Comptroller 
of the Currency (OCC) recently proposed a rule that included changes 
to the enhanced supplementary leverage ratio standards. See https://www.gpo.gov/fdsys/pkg/FR-2018-04-19/pdf/2018-08066.pdf.
    \23\ See Table 1 at https://www.federalreserve.gov/publications/comprehensive-capital-analysis-and-review-summary-instructions.htm. 
Some banks, depending on their size and complexity, must meet 
additional buffers--capital conservation buffer, countercyclical 
buffer and globally systemically important bank surcharge--but these 
are not included in the stress test assessment.
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Comprehensive Capital Analysis and Review (CCAR) and Capital Plan 
Requirements
    In addition to the requirements that are tied to a prompt 
corrective action framework, the Federal Reserve Board's annual CCAR 
also assesses the capital adequacy of large bank holding companies with 
at least $50 billion in assets. The CCAR review is based on a going-
concern structure, where the bank holding company must hold enough 
capital to withstand a severely adverse scenario, continue to lend, and 
meet creditor obligations over a nine-quarter period of time. The CCAR 
stress tests are tied to the Board's capital plan requiring that these 
bank holding companies submit a capital plan to the Federal Reserve 
each year. The bank holding companies are required to report the 
results of stress tests conducted under supervisory scenarios provided 
by the Board and under a baseline scenario and a stress scenario 
designed by the bank holding company.
    The Board's qualitative assessment of each bank holding company's 
capital plan considers the institution's capital planning process, 
including the stress testing methods, internal controls, and 
governance. The quantitative assessment of the plan is based on the 
supervisory and institution-run stress tests that are conducted in part 
under the Dodd-Frank Act stress test rules.\24\

[[Page 33323]]

The Board may object to a capital plan based on the qualitative and 
quantitative assessments, and, as a result, may restrict capital 
distributions.\25\ However, the stress test results do not trigger 
prompt corrective actions as described above under the Federal Deposit 
Insurance Act.
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    \24\ The DFAST and CCAR capital analyses use the same 
projections of income, assets and RWA, but use different capital 
action assumptions to project post-stress capital levels.
    \25\ The Federal Reserve Board recently published a notice of 
proposed rulemaking that would create a single, integrated capital 
requirement by combining the quantitative assessment of the CCAR 
with the buffer requirements in the Board's regulatory capital rule, 
and eliminate the CCAR quantitative objection in the process. See 83 
FR 18160 (April 25, 2018).
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    Under CCAR, during anticipated stress periods defined by the stress 
test scenarios required by the Board, banks are expected to maintain 
capital levels above the minimum risk-based and leverage capital ratios 
for adequately capitalized institutions under the prompt corrective 
action framework described earlier.\26\
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    \26\ The stress test uses RWA based on the standardized 
approach, but these large banks may use the model-based internal 
ratings-based approach for capital adequacy under the prompt 
corrective action framework.
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Comparison of Enterprise and Bank Business Models
    While the Enterprises are comparable in size to some of the largest 
depository institutions, the relative risks of banks compared to the 
Enterprises differ in important ways. These differences include, among 
others, the sources and associated risk level of income and assets, 
differences in funding risk, and the relative exposure to mortgage 
assets. Each of these differences is discussed below.
    First, while banks have a more diversified source of income and 
assets compared to the Enterprises, the overall risk of Enterprise 
mortgage assets is lower than that of banks. Banks are depository 
institutions that attract customer deposits on which banks pay interest 
expense, and lend those funds through loans in diversified asset 
classes to other customers from whom the bank earns interest income, 
thereby earning net interest income. Bank lending covers a number of 
different asset classes, not just real estate lending, such as credit 
cards, car loans, and business loans. Since the repeal of the Glass-
Steagall Act in 1999, banks have also been more active in earning non-
interest income through brokerage fees and other business activities. 
However, traditional depository institutions still rely primarily on 
net-interest income, as compared to investment banks.
    The Enterprises are monoline businesses focused on mortgage assets. 
For banks, mortgage assets carry a 50 percent risk weight in the Basel 
standardized framework. Therefore, the Enterprises' aggregate risk 
weight is lower than the average risk weight of banks with an abundance 
of assets with risk weights higher than 50 percent. To derive the risk-
weighted asset density of bank assets, FHFA looked at the 31 largest 
bank holding companies subject to CCAR, to calculate an average risk-
weighted asset density using end-of-quarter data from the first quarter 
of 2011 through the fourth quarter of 2014. The analysis estimated an 
overall risk-weighted asset density of 72 percent for the banks 
compared to 50 percent for residential mortgages.
    Second, banks rely on more volatile funding sources compared to the 
Enterprises, which exposes banks to a greater degree of funding risk 
during times of market and economic stress. Banks use short-term 
customer deposits and debt as sources of funding for their business 
activity, both of which can leave a bank in need of new funding sources 
during times of economic uncertainty, such as during the recent 
financial crisis. In such situations, a bank could find that new 
sources of debt become considerably more expensive, if such sources are 
available at all. This type of funding risk is commonly referred to as 
rollover risk. By comparison, the Enterprises' core credit guarantee 
business of purchasing and securitizing mortgage loans provides a more 
stable source of funding that cannot be withdrawn during periods of 
market and economic stress, and is therefore not subject to rollover 
risk. Investors purchasing Enterprise mortgage-backed securities 
provide the companies with match-funding for these mortgage assets. The 
funding risk associated with the Enterprises' retained portfolios is 
more comparable to the funding risks of banks described above.
    Third, even when comparing risk specifically associated with 
mortgage lending the Enterprises hold less risk compared to the 
mortgage investments of banks. Banks hold a larger portion of 
mortgages--both single-family and multifamily loans--as whole loans on 
their balance sheets. This exposes banks to interest rate, market, and 
credit risks associated with those loans. On the other hand, through 
their core guarantee business of purchasing mortgage loans and issuing 
mortgage-backed securities, the Enterprises transfer the interest rate 
and market risk of these loans to private investors. In addition, as 
mentioned above, the Enterprises also face substantially less funding 
risk compared to banks because of the match funding provided through 
mortgage-backed securities investors.
    While the Enterprises remain responsible following securitizations 
for guaranteeing the credit risk of securitized loans, they have also 
developed ways to transfer significant parts of their credit risk to 
private market participants. During conservatorship, the Enterprises 
have developed credit risk transfer programs to transfer a portion of 
the credit risk for single-family mortgage purchases to private 
investors. In addition, the Enterprises' unique business models 
transfer credit risk on multifamily loans to private investors. Thus, 
the Enterprises have transferred a significant portion of the credit 
risk associated with their whole mortgage loans, whereas comparable 
whole mortgage loans are typically held by banks on their balance 
sheets.
    The risk associated with the Enterprises' retained portfolios is 
similar in nature to risks held by banks. However, the Enterprises' 
retained portfolios have declined by more than a combined 60 percent 
while in conservatorship and are required by the PSPAs not to exceed 
$250 billion. While the Enterprises still have legacy assets that were 
purchased before conservatorship as part of their retained portfolios, 
their ongoing use of retained portfolios during conservatorship has 
focused on supporting their core credit guarantee business. The 
Enterprises use their cash window to purchase single-family and 
multifamily loans directly from lenders, often smaller lenders, and 
aggregate these loans for subsequent securitization. The cash window 
enables smaller lenders to access the secondary market at competitive 
rates. The Enterprises also use their retained portfolios to repurchase 
non-performing loans as part of loss mitigation efforts to reduce 
losses for the Enterprises and taxpayers, and to help homeowners stay 
in their homes whenever possible.
    FHFA is also not including separate buffers in this proposed rule 
beyond the proposed risk-invariant going-concern buffer for several 
reasons. First, FHFA believes that the robust features it selected for 
the proposed risk-based capital requirements make including a separate 
buffer unnecessary. These features include (1) covering losses for 
different loan categories for a severe stress event comparable to the 
recent financial crisis,\27\ with somewhat more

[[Page 33324]]

conservative house price recoveries than were observed following the 
recent financial crisis, (2) setting capital requirements without 
including future revenue, consistent with the Basel methodology, (3) 
requiring the full life-of-loan capital be put in place for each loan 
acquisition, and (4) the proposed risk-based capital requirements would 
include components for operational risk, market risk, and a risk-
invariant going-concern buffer. Second, FHFA has the authority to 
increase capital requirements when prudent--either for risk-based 
capital or minimum leverage capital requirements--by order or 
regulation. Third, while bank capital buffers are used to decide 
whether to restrict distributions of income, rather than changing the 
level of capital that is necessary to declare a bank undercapitalized 
and activate the prompt-corrective-action framework if the level is not 
met, the primary intent of the FHFA capital rule would be to establish 
the level of capital that should be considered ``adequate'' for the 
prompt-corrective-action framework of the Safety and Soundness Act.
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    \27\ The 25 percent home price decline assumption in the severe 
stress event is also consistent with assumptions used in the DFAST 
severely adverse scenario over the past several years, although the 
2017 DFAST cycle assumes a 30 percent home price decline in its 
severely adverse scenario.
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G. Dodd-Frank Act Stress Test Process

    Section 165 of the Dodd-Frank Act required the annual stress 
testing of certain financial companies with consolidated assets over 
$10 billion that are supervised by a federal regulator. Consistent with 
the Act, FHFA conducts stress tests of the Enterprises to determine 
whether each firm has the capital necessary to absorb losses during a 
period of adverse economic conditions. While in conservatorship, the 
Enterprises receive financial support through the PSPAs with the 
Treasury Department. Although the PSPAs restrict the ability of the 
Enterprises to hold equity capital beyond their approved capital 
buffers, FHFA expects the Enterprises to have procedures in place to 
support sound business decisions and the Enterprises have continued to 
consider capital levels and return on capital as integral parts of 
their business decision-making processes.
    FHFA's stress testing rule establishes the basic requirements for 
the Enterprises on how to conduct the Dodd-Frank Act Stress Test 
(DFAST) each year. The Dodd-Frank Act requires financial regulators to 
use generally consistent and comparable stress scenarios. FHFA has 
generally aligned the stress scenarios for the Enterprises with the 
Federal Reserve Board's supervisory scenarios for annual stress testing 
required under the DFAST rule and CCAR. Each year, FHFA provides the 
Enterprises with specific instructions and guidance for conducting the 
stress tests, as well as for reporting and publishing results.
    The annual stress testing process includes three distinct 
scenarios--baseline, adverse, and severely adverse--with each scenario 
covering a nine-quarter period. The scenarios include macroeconomic 
variables, interest-rate variables, and indices (e.g., unemployment 
rates, mortgage rates, house price paths, and gross domestic product). 
The Enterprises use these variables and indices as model inputs to 
stress the retained portfolios and guarantee business.
    Since the Enterprises began conducting the annual DFAST process in 
2014, the severely adverse scenario has generally represented economic 
conditions similar to those that occurred during the 2008 financial 
crisis. Although the specific scenario variables differ from year to 
year, the conditions represented by the macroeconomic, interest rate, 
and asset price shocks in the severely adverse scenario are consistent 
with a major market disruption similar to the disruption experienced in 
the 2008 crisis.
    The severely adverse scenario also includes a global market shock 
component which is tailored to include particular risks faced by the 
Enterprises. This shock is treated as an add-on to the macroeconomic 
scenario and is taken as an instantaneous loss and reduction of capital 
in the first quarter of the nine-quarter planning horizon. It is 
assumed that none of these losses are recovered over the nine quarters. 
The Enterprises apply the shock to portfolio assets that are subject to 
fair value accounting (i.e., assets classified as held-for-trading, 
available-for-sale, and held-for-sale). In addition, the global market 
shock includes a default of each Enterprise's largest counterparty. The 
shock assumes that each Enterprise incurs losses due to the sudden and 
unexpected default of the counterparty to which it has the greatest 
financial exposure. Counterparties within the scope of the largest 
counterparty default component include security dealers for 
derivatives, private mortgage insurers, and multifamily credit 
enhancement providers.
    The Federal Reserve Board releases DFAST supervisory scenarios in 
January or February of each year. FHFA provides the Enterprises with 
summary instructions and guidance within 30 days following the issuance 
of the Federal Reserve Board's final element of its supervisory 
scenarios. The instructions include submission templates for use in 
compiling and reporting the DFAST results for the three stress 
scenarios. The Enterprises conduct the stress tests and submit their 
results to FHFA on or before May 20 each year. For capital planning 
purposes, the Enterprises focus on the severely adverse scenario. FHFA 
requires the Enterprises to publicly disclose the DFAST stress test 
results under the severely adverse scenario between August 1 and August 
15 each year.
    For DFAST reporting purposes, FHFA requires the Enterprises to 
report two sets of financial results for the severely adverse scenario: 
One with and one without the establishment of a valuation allowance on 
deferred tax assets. In general, deferred tax assets are considered a 
capital component because these assets have loss absorbing capability 
by offsetting losses through the reduction of taxes. A valuation 
allowance on deferred tax assets is typically established to reduce 
deferred tax assets when it is more likely than not that an institution 
would not generate sufficient taxable income in the foreseeable future 
to realize all or a portion of its deferred tax assets. A valuation 
allowance on deferred tax assets is a non-cash charge resulting in a 
reduction in income and the retained earnings component of capital.
    In 2008, during the financial crisis, Fannie Mae and Freddie Mac 
established partial valuation allowances on deferred tax assets of 
$30.8 billion and $22.4 billion, respectively. The reduction in capital 
from partial valuation allowances in 2008 contributed to the 
Enterprises' draws from the Treasury Department. Both Enterprises 
released the valuation allowances on deferred tax assets several years 
later, which resulted in a benefit to income at both Enterprises. For 
full transparency of the potential impact of deferred tax assets on the 
Enterprises' capital positions in a stress scenario, FHFA requires the 
Enterprises to disclose the severely adverse results both with and 
without the establishment of a valuation allowance on deferred tax 
assets. In the 2017 DFAST severely adverse scenario, for results that 
do not include establishing a valuation allowance on deferred tax 
assets, Fannie Mae's cumulative stress losses were $15 billion and 
Freddie Mac's cumulative stress losses were $20 billion. For results 
that include establishing a valuation allowance on deferred tax assets, 
Fannie Mae's cumulative stress losses were $58 billion and Freddie 
Mac's cumulative stress losses were $42 billion.

[[Page 33325]]

H. Important Considerations for the Proposed Rule

    In summary, in developing the proposed rule, FHFA considered all 
information in this proposal and developed the proposed rule with the 
following factors in mind:
    1. The Enterprises should operate under a robust capital framework 
that is similar to capital frameworks applicable to banks and other 
financial institutions, but appropriately differentiates from other 
capital requirements based on the actual risks associated with the 
Enterprises' businesses;
    2. In proposing capital requirements, FHFA should use the 
substantial expertise and experience gained during the protracted 
conservatorships of the Enterprises to ensure that the capital 
requirements secure the safety and soundness of the Enterprises while 
also supporting their statutory missions to foster and increase 
liquidity of mortgage investments and promote access to mortgage credit 
throughout the Nation;
    3. FHFA considers it prudent to have risk-based capital 
requirements that include components of credit risk, operational risk, 
market risk, and a risk-invariant going-concern buffer; that require 
full life-of-loan capital for each loan acquisition; that are 
calculated to cover losses in a severe stress event comparable to the 
recent financial crisis, but with house price recoveries that are 
somewhat more conservative than experienced following that crisis; and 
that do not count future Enterprise revenue toward capital;
    4. FHFA's ongoing authority under the Safety and Soundness Act to 
increase by order or regulation capital requirements--either risk-based 
or minimum leverage--reduces the need to put in place at this time 
specific limited-purpose or countercyclical buffers; and
    5. It may be necessary in the future for FHFA to revise this rule 
or to develop a separate capital planning rule to more fully address 
stress testing of the Enterprises, the timing and substance of which 
will depend on the status of the Enterprises after housing finance 
reform.

II. The Proposed Rule

A. Components of the Proposed Rule

Risk-Based Capital Requirements
    The Enterprises' assets and operations are exposed to different 
types of risk, and the proposed risk-based capital requirements would 
provide a granular and comprehensive approach for assigning capital 
requirements to individual asset and guarantee categories. The proposed 
risk-based capital requirements cover credit risk, including 
counterparty risk, as well as market risk and operational risk capital 
requirements for each asset and guarantee category. The proposed risk-
based capital requirements also include a going-concern buffer, which 
would require the Enterprises to hold additional capital beyond what is 
required to cover economic losses during a severe financial stress 
event in order to maintain market confidence.
    The credit risk capital requirements in the proposed rule are based 
on unexpected losses (stress losses minus expected losses) over the 
lifetime of mortgage assets. The proposed requirements were developed 
using historical loss data, including loss experience from the recent 
financial crisis. In addition, the proposed rule requires the 
Enterprises to hold this capital at the time of purchasing or 
guaranteeing an asset, and it does not, in general, count any future 
revenue toward the credit risk capital requirements.
    For single-family and multifamily whole loans and guarantees, the 
proposed credit risk capital requirements use look-up tables consisting 
of base grids and risk multipliers to adjust capital requirements for 
the risk characteristics of each type of mortgage asset. Under this 
approach, an Enterprise's required capital will change with the 
composition of its book of business.
    The proposed rule also includes a framework through which the 
Enterprises' credit risk capital requirements would be reduced to 
reflect the benefit of credit risk transfer transactions that protect 
the Enterprises and taxpayers from bearing potential credit losses. 
FHFA's proposed approach to calculating the capital relief provided by 
credit risk transfer transactions seeks to capture the credit risk 
protection provided while also accounting for counterparty risk for 
those transactions that are not fully funded up front.
    The market risk component of the proposed risk-based capital 
framework establishes specific requirements for the market risk 
associated with certain Enterprise assets. The proposed approach 
focuses on capturing the spread risk associated with holding different 
assets in the retained portfolio: Single-family whole loans, 
multifamily whole loans, private label securities (PLS), commercial 
mortgage-backed securities (CMBS) and other assets with market risk 
exposure.\28\ These mortgages include legacy assets acquired by the 
Enterprises prior to conservatorship and assets purchased as part of 
the Enterprises' ongoing aggregation function, including aggregating 
single-family loans through the cash window before securitizing the 
loans into MBS, and Freddie Mac's aggregation of multifamily loans 
before placing the loans in K-deals or other securitizations.
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    \28\ The Enterprises are no longer acquiring PLS and CMBS, and 
their holdings of these assets are currently in run-off mode.
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    The operational risk component of the proposed risk-based capital 
framework establishes an operational risk capital requirement of 8 
basis points for all assets and guarantees to reflect the inherent risk 
in ongoing business operations.
    The going-concern buffer component of the proposed risk-based 
capital framework establishes a 75 basis point requirement for most 
assets and guarantees, regardless of credit, market, or operational 
risk capital requirements. This buffer would ensure that the 
Enterprises maintain at least 75 basis points of capital on any 
mortgage guarantee, whole loan, or mortgage-related security held by 
the Enterprises. Based on the current size and composition of the 
Enterprises' books of business, FHFA estimates that the going-concern 
buffer would provide the Enterprises with sufficient capital to 
continue operating without external capital support for one to two 
years after a stress event.
    FHFA sought to reduce model risk by developing the proposed risk-
based requirements using a combination of the results from multiple 
models.\29\ The proposed capital requirements are based on the model 
results from both Enterprises, and in some cases on model results from 
both Enterprises and from FHFA. In all cases the models were estimated 
to the extent possible using the Enterprises' historical loss data, 
including experiences from the recent housing crisis. While the 
proposed risk-based capital requirements reflect the Agency's view of 
the relative risk of Enterprise assets, which is subject to model risk, 
the two proposed alternative minimum leverage capital requirements are 
intended to provide a backstop to offset and balance this risk.
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    \29\ FHFA acknowledges that multiple models could increase the 
burden of ongoing model risk management. However, FHFA sought to 
increase the reliability of the estimations used in the proposed 
grids and multiplier framework by combining the results of multiple 
models, and hence decreasing overall model risk.

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[[Page 33326]]

Minimum Leverage Capital Requirement
    The proposed rule includes two alternative minimum leverage capital 
requirement proposals for consideration. Under the first approach, the 
2.5 percent alternative, the Enterprises would be required to hold 
capital equal to 2.5 percent of total assets (as determined in 
accordance with GAAP) and off-balance sheet guarantees related to 
securitization activities, regardless of the risk characteristics of 
the assets and guarantees or how they are held on the Enterprises' 
balance sheets. Under the second approach, the bifurcated alternative, 
the Enterprises would be required to hold capital equal to 1.5 percent 
of trust assets and 4 percent of non-trust assets, where trust assets 
are defined as Fannie Mae mortgage-backed securities or Freddie Mac 
participation certificates held by third parties and off-balance sheet 
guarantees related to securitization activities, and non-trust assets 
are defined as total assets as determined in accordance with GAAP plus 
off-balance sheet guarantees related to securitization activities minus 
trust assets. The Enterprises' retained portfolios would be included in 
non-trust assets. Both the 2.5 percent alternative and the bifurcated 
alternative are discussed in greater detail in the Minimum Leverage 
Capital Requirements section.
    In considering both the need for and the structure of an updated 
minimum leverage capital requirement, FHFA has taken into consideration 
several factors, including (1) how to best set the minimum leverage 
requirement as a backstop to the risk-based capital requirements; and 
(2) how to appropriately capture the funding risks of the Enterprises. 
The Safety and Soundness Act requires that FHFA establish, like other 
financial regulators, a minimum leverage requirement that can serve as 
a backstop in the event the risk-based capital standard becomes too 
low. As discussed earlier, risk-based capital requirements depend on 
models and, therefore are subject to the risk that the applicable model 
will underestimate or fail to address a developing risk. Another factor 
relevant in considering the leverage requirement's role as a backstop 
is the pro-cyclicality of a risk-based capital framework. Because the 
proposed risk-based requirements use mark-to-market LTVs for loans held 
or guaranteed by the Enterprises in determining capital requirements, 
as home prices appreciate the Enterprises would be allowed to release 
capital as LTVs fall. Should home prices continue to rise and 
unemployment continue to fall, as each have done over the last several 
years, risk-based capital requirements such as the requirements in this 
proposed rule, would be expected to fall. In this context, a minimum 
leverage capital requirement would reduce the amount of capital 
released as risk-based capital levels fell below an applicable leverage 
requirement. In addition, and as discussed further below, FHFA has 
authority to adjust components of the risk-based capital requirements 
as a means of avoiding the pro-cyclical release of capital.
    In the banking regulatory context, leverage requirements serve to 
help mitigate the risk that short-term funding, on which many banks 
rely, will become unavailable during a stress event. In proposing 
minimum leverage requirements, FHFA has considered the unique funding 
risks facing the Enterprises. As discussed in more detail below, in 
both the single-family and multifamily guarantee business lines the 
Enterprises are provided a stable source of funding that is match-
funded with the mortgage assets they purchase. While these mortgage 
assets are reflected on the balance sheets of the Enterprises and 
represent the vast majority of their assets, the funding for these 
assets has already been provided and cannot be withdrawn during times 
of market stress.
    FHFA is seeking comment on all aspects of both the 2.5 percent 
alternative and the bifurcated alternative proposed minimum leverage 
capital requirements, including how the different approaches relate to 
and complement the proposed risk-based capital measure.

B. Impact of the Proposed Rule

    This section provides information about the impact of the proposed 
rule both at the end of 2007 (December 31, 2007) and at the end of the 
third quarter of 2017 (September 30, 2017). FHFA is providing this 
information to inform commenters about the impact the proposed rule 
would have on the Enterprises' capital requirements both leading up to 
the crisis and under the Enterprises' current operations in 
conservatorship. The summary information through the third quarter of 
2017 is intended solely to provide context for commenters about what 
the impact of the proposed rule would be on the Enterprises if the 
Enterprises were able to build capital, and is specifically not 
intended by FHFA as suggesting steps toward recapitalizing the 
Enterprises while the Enterprises are in conservatorship. The summary 
information also provides context about the impact of the proposed rule 
on Enterprise business decisions being made while the Enterprises 
operate in conservatorship. While they are in conservatorship, FHFA 
expects the Enterprises to include capital assumptions in pricing and 
business decisions even though the Enterprises are unable to build 
capital and FHFA has suspended their regulatory capital 
classifications.
Impact of the Proposed Rule at the End of 2007
    In 2008, the entire net worth of both Enterprises was depleted by 
losses. The Treasury Department invested in senior preferred stock of 
both Enterprises in order to offset losses. To offset losses and 
eliminate negative capital positions, Fannie Mae drew $116 billion from 
the Treasury Department between 2008 and the fourth quarter of 2011, 
while Freddie Mac drew $71 billion between 2008 and the first quarter 
of 2012. Including the loss of net worth at the start of 2008, Fannie 
Mae lost a total of $167 billion and Freddie Mac lost a total of $98 
billion in the housing and financial crisis.\30\
---------------------------------------------------------------------------

    \30\ Between the second quarter of 2012 and the third quarter of 
2017, neither Enterprise required additional funds from the Treasury 
Department, and the PSPA's capital reserve had been set to decline 
to zero in 2018. However, in December 2017, FHFA entered into a 
letter agreement with the Treasury Department on behalf of the 
Enterprises to reinstate a $3.0 billion capital reserve amount under 
the PSPA for each Enterprise, beginning in the fourth quarter of 
2017, against income fluctuations and future losses. Since the 
agreement was reached, Congress passed and the President signed the 
Tax Cut and Jobs Act of 2017 on December 22, 2017, that lowered the 
corporate tax rate from 35 percent to 21 percent. As a result, the 
value of Fannie Mae's net deferred tax assets declined by $9.9 
billion in the fourth quarter of 2017, necessitating a $3.7 billion 
draw from the Treasury Department, while the value of Freddie Mac's 
net deferred tax assets declined by $5.4 billion, necessitating a 
draw from the Treasury Department of $312 million.
---------------------------------------------------------------------------

    FHFA assessed whether the capital requirements in the proposed rule 
would have required the Enterprises to hold sufficient capital at the 
end of 2007, when combined with the Enterprises' revenues, to absorb 
losses sustained between 2008 and the dates at which the Enterprises no 
longer required draws from the Treasury Department to eliminate 
negative net worth--the fourth quarter of 2011 for Fannie Mae and the 
first quarter of 2012 for Freddie Mac.
    FHFA compared each Enterprise's estimated minimum leverage capital 
requirement under both alternatives and the risk-based capital 
requirement based on the proposed rule for the entire portfolio of 
business at the end of 2007 to the Enterprises' peak cumulative capital 
losses as described above. The

[[Page 33327]]

peak cumulative capital losses include losses due to establishing 
valuation allowances on deferred tax assets (DTAs) during the crisis. 
To calculate the minimum leverage capital requirement at the end of 
2007, FHFA made a simplifying assumption because accounting rules have 
changed since 2007. Credit-guaranteed loans are now reported as assets, 
while in 2007 most credit guarantees were not on the balance sheet as 
they were netted with guarantee obligations. For purposes of this 
analysis FHFA treated the credit guarantees in 2007 as assets.\31\
---------------------------------------------------------------------------

    \31\ The Enterprises continue to report their capital levels 
based on prior accounting rules. See Regulatory Interpretation 2010-
RI-1, Jan. 12, 2010.
---------------------------------------------------------------------------

    FHFA also compared each Enterprise's single-family credit risk 
capital requirement as of December 31, 2007 to the Enterprise's single-
family lifetime credit losses, where lifetime losses are defined in 
this section as actual single-family credit losses through June 30, 
2017 plus projected remaining lifetime single-family credit losses on 
the December 31, 2007 portfolio.
    A significant portion of the Enterprises' credit losses since 2007 
resulted from higher risk loans which the Enterprises no longer 
purchase or guarantee due to the Ability to Repay and Qualified 
Mortgage rule issued by the CFPB in 2013 and due to the Enterprises' 
strengthened underwriting standards. Because the Enterprises no longer 
purchase these loans, FHFA also assessed whether the credit risk 
capital requirement under the proposed rule would have been sufficient 
to cover projected lifetime losses on loans that meet the Enterprises' 
current acquisition criteria.
    In sum, the amount of capital required by the Enterprises under the 
proposed risk-based capital requirements would have exceeded the 
cumulative losses, net of revenues earned, at both Enterprises between 
2008 and the respective date at which each Enterprise no longer 
required draws from the Treasury Department. In this analysis, 
cumulative losses include credit losses on all loans purchased, 
including those no longer eligible for purchase, and losses due to 
establishing a valuation allowance on DTAs. In evaluating how the 
proposed risk-based capital requirements would have applied to the 
Enterprises at the end of 2007, it is important to note that the 
proposed rule would establish a risk-based capital requirement for DTAs 
that would offset the DTAs included in core capital in a manner 
generally consistent to the U.S. financial regulators' treatment of 
DTAs.\32\ In addition, the credit risk capital component of the 
proposed risk-based capital requirements exceeded projected credit 
losses for both Enterprises for all loans acquired or guaranteed, 
excluding those that are not currently eligible for purchase.
---------------------------------------------------------------------------

    \32\ See section II.C.8 for a detailed discussion of DTAs.
---------------------------------------------------------------------------

Fannie Mae
    Fannie Mae's statutory minimum leverage capital requirement was $42 
billion as of December 31, 2007. For comparison, and as illustrated in 
the table below, Fannie Mae's estimated minimum leverage capital 
requirement as of December 31, 2007 based on the proposed rule would 
have been $76 billion under the 2.5 percent alternative or $68 billion 
under the bifurcated alternative. Fannie Mae's estimated minimum 
leverage capital requirement under either proposed alternative as of 
December 31, 2007 would have been insufficient to cover Fannie Mae's 
peak cumulative capital losses of $167 billion. However, Fannie Mae's 
estimated risk-based capital requirement of $171 billion based on the 
proposed rule would have exceeded Fannie Mae's peak cumulative capital 
losses of $167 billion. We include in Fannie Mae's peak cumulative 
capital losses the valuation allowance on deferred tax assets of $64 
billion and revenues of $78 billion earned between 2008 and the fourth 
quarter of 2011.

 Table 1--Fannie Mae's Capital Requirement Comparison to Peak Cumulative
                             Capital Losses
------------------------------------------------------------------------
                                                            % of total
                                                          assets and off-
                                                           balance sheet
                                           $ in billions   guarantees as
                                                            of Dec 31,
                                                              2007 *
------------------------------------------------------------------------
Net Worth as of Dec 31, 2007............             $44             1.4
Equity Issuance in 2008.................               7             0.2
Cumulative Draws **.....................             116             3.8
Peak Cumulative Losses since Dec 31,                 167             5.5
 2007...................................
Statutory Minimum Capital Requirement as              42             1.4
 of Dec 31, 2007........................
. . . Relative to Peak Capital Losses...           (126)           (4.1)
2.5% Alternative as of Dec 31, 2007.....              76             2.5
. . . Relative to Peak Capital Losses...            (91)           (3.0)
Bifurcated Alternative as of Dec 31,                  68             2.2
 2007...................................
. . . Relative to Peak Capital Losses...           (100)           (3.3)
Proposed Risk-based Capital Requirement              171             5.6
 as of Dec 31, 2007.....................
. . . Relative to Peak Capital Losses...               3             0.1
------------------------------------------------------------------------
* Includes Fannie Mae MBS and Freddie Mac participation certificates
  held by third parties, and off-balance sheet guarantees related to
  securitization activities.
** Includes the valuation allowance on deferred tax assets of $64
  billion, Treasury draws of $20 billion related to senior preferred
  dividends paid to the Treasury Department between 2008 and the fourth
  quarter of 2011, and revenues of $78 billion earned over the same
  period.

    Next, we analyzed Fannie Mae's single-family portfolio in the 
fourth quarter of 2007 and stripped out the loans that would not be 
acquired today under Fannie Mae's current acquisition criteria. We then 
added projected future credit losses for the loans that remained to the 
already realized credit losses to determine Fannie Mae's lifetime 
single-family credit losses on that portfolio. In both cases, the 
credit risk capital requirement would have exceeded the projected 
lifetime credit losses. As illustrated in the table below, Fannie Mae's 
estimated single-family credit risk

[[Page 33328]]

capital requirement of $94 billion as of December 31, 2007 based on the 
proposed rule would have exceeded Fannie Mae's lifetime single-family 
credit losses of $85 billion on the December 31, 2007 guarantee 
portfolio for all loans purchased. In addition, excluding loans that 
the Enterprises no longer acquire, Fannie Mae's credit risk capital 
requirement per the proposed rule of $30 billion would have exceeded 
projected lifetime losses of $21 billion.

   Table 2--Fannie Mae's Single-Family Credit Risk Capital Requirement
           Comparison to Lifetime Single-Family Credit Losses
------------------------------------------------------------------------
                                                          % of UPB as of
                                           $ in billions   Dec 31, 2007
------------------------------------------------------------------------
Lifetime Single-Family Credit Losses on              $85             3.4
 the Dec 31, 2007 Guarantee Portfolio...
Proposed SF Credit Risk Capital                       94             3.7
 Requirement as of Dec 31, 2007.........
. . . Relative to Lifetime Credit Losses               9             0.4
Lifetime Single-Family Credit Losses on               21             1.5
 the Dec 31, 2007 Guarantee Portfolio
 using Current Acquisition Criteria *...
Proposed SF Credit Risk Capital                       30             2.1
 Requirement using Current Acquisition
 Criteria *.............................
. . . Relative to Lifetime Credit Losses               9             0.7
------------------------------------------------------------------------
* Excludes loans with the following characteristics: Debt-to-income
  ratio at origination greater than 50 percent, cash out refinances with
  total LTV greater than 85 percent, investor loans with total LTV
  greater than or equal to 90 percent, Alt-A, Negative Amortization,
  Interest-only, Low or No Documentation, and other legacy programs.

Freddie Mac
    Freddie Mac's statutory minimum capital requirement was $26 billion 
as of December 31, 2007. For comparison, and as illustrated in the 
table below, Freddie Mac's estimated minimum leverage capital 
requirement as of December 31, 2007 based on the proposed rule would 
have been $54 billion under the 2.5 percent alternative or $53 billion 
under the bifurcated alternative. Freddie Mac's estimated minimum 
leverage capital requirement under either proposed alternative as of 
December 31, 2007 would have been insufficient to cover Freddie Mac's 
peak cumulative capital losses of $98 billion. However, Freddie Mac's 
estimated risk-based capital requirement of $110 billion based on the 
proposed rule would have exceeded Freddie Mac's peak cumulative capital 
losses of $98 billion by $12 billion. We include in Freddie Mac's peak 
cumulative capital losses the valuation allowance on deferred tax 
assets of $34 billion and revenues of $64 billion earned between 2008 
and the first quarter of 2012.

Table 3--Freddie Mac's Capital Requirement Comparison to Peak Cumulative
                             Capital Losses
------------------------------------------------------------------------
                                                            % of total
                                                          assets and off-
                                                           balance sheet
                                           $ in billions   guarantees as
                                                            of Dec 31,
                                                              2007 *
------------------------------------------------------------------------
Net worth as of Dec 31, 2007............             $27             1.2
Cumulative Treasury Draws **............              71             3.3
Peak cumulative losses since Dec 31,                  98             4.5
 2007...................................
Statutory Minimum Capital Requirement as              26             1.2
 of Dec 31, 2007........................
. . . Relative to Peak Capital Losses...            (72)           (3.3)
2.5% Alternative as of Dec 31, 2007.....              54             2.5
. . . Relative to Peak Capital Losses...            (44)           (2.0)
Bifurcated Alternative as of Dec 31,                  53             2.4
 2007...................................
. . . Relative to Peak Capital Losses...            (45)           (2.1)
Proposed Risk-based Capital Requirement              110             5.0
 as of Dec 31, 2007.....................
. . . Relative to Peak Capital Losses...              12             0.5
------------------------------------------------------------------------
* Includes Fannie Mae MBS and Freddie Mac participation certificates
  held by third parties, and off-balance sheet guarantees related to
  securitization activities.
** Includes the valuation allowance on deferred tax assets of $34
  billion, Treasury draws of $18 billion related to senior preferred
  dividends paid to the Treasury Department between 2008 and the first
  quarter of 2012, and revenues of $64 billion earned over the same
  period.

    Next, we analyzed Freddie Mac's single-family portfolio in the 
fourth quarter of 2007 and stripped out the loans that would not be 
acquired today under Freddie Mac's current acquisition criteria. We 
then added projected future credit losses for the loans that remained 
to the already realized credit losses to determine Freddie Mac's 
lifetime single-family credit losses on that portfolio. After stripping 
out the loans that would not be acquired under Freddie Mac's current 
acquisition criteria, the credit risk capital requirement would have 
exceeded the projected lifetime credit losses. As illustrated in the 
table below, Freddie Mac's estimated single-family credit risk capital 
requirement of $59 billion as of December 31, 2007 based on the 
proposed rule would not have exceeded Freddie Mac's lifetime single-
family credit losses of $64 billion on the December 31, 2007 guarantee 
portfolio for all loans purchased. However, excluding loans that the 
Enterprises no longer acquire, Freddie Mac's credit risk capital 
requirement per the proposed rule of $24 billion would have exceeded 
projected lifetime losses of $20 billion.

[[Page 33329]]



  Table 4--Freddie Mac's Single-Family Credit Risk Capital Requirement
           Comparison to Lifetime Single-Family Credit Losses
------------------------------------------------------------------------
                                                          % of UPB as of
                                           $ in billions   Dec 31, 2007
------------------------------------------------------------------------
Lifetime Single-Family Credit Losses on              $64             3.7
 the Dec 31, 2007 Guarantee Portfolio...
Proposed SF Credit Risk Capital                       59             3.4
 Requirement as of Dec 31, 2007.........
. . . Relative to Lifetime Credit Losses             (5)           (0.3)
Lifetime Single-Family Credit Losses on               20             1.7
 the Dec 31, 2007 Guarantee Portfolio
 using Current Acquisition Criteria *...
Proposed SF Credit Risk Capital                       24             2.1
 Requirement using Current Acquisition
 Criteria *.............................
. . . Relative to Lifetime Credit Losses               4             0.4
------------------------------------------------------------------------
* Excludes loans with the following characteristics: Debt-to-income
  ratio at origination greater than 50 percent, cash out refinances with
  total LTV greater than 85 percent, investor loans with total LTV
  greater than or equal to 90 percent, Alt-A, Negative Amortization,
  Interest-only, Low or No Documentation, and other legacy programs.

Impact of the Proposed Rule as of September 30, 2017
    FHFA estimated the impact of the proposed rule on the Enterprises 
as of September 30, 2017. Under the 2.5 percent alternative, FHFA 
estimates a combined minimum leverage capital requirement for both 
Enterprises of $139.4 billion as of September 30, 2017, while under the 
bifurcated alternative FHFA estimates a combined minimum leverage 
capital requirement for both Enterprises of $103 billion. FHFA also 
estimates a combined risk-based capital requirement of $180.9 billion 
or 3.2 percent of the Enterprises' portfolios as of September 30, 2017. 
Credit risk capital accounts for $112.0 billion before CRT and $90.5 
billion after CRT, market risk capital accounts for $19.4 billion, 
operational risk capital accounts for $4.3 billion, and the going-
concern buffer accounts for $39.9 billion. The capital requirement for 
the Enterprises' DTAs accounts for the remaining $26.8 billion. A 
detailed breakdown of FHFA's estimated risk-based capital requirements 
by risk category for the Enterprises combined, and separately for 
Fannie Mae and Freddie Mac, as of September 30, 2017 is presented in 
Table 5. A breakdown of FHFA's estimated risk-based capital 
requirements by asset category for the Enterprises combined, as of 
September 30, 2017, is presented in Table 6. A breakdown of FHFA's 
estimated minimum leverage capital requirement under both proposed 
alternatives for the Enterprises combined, and separately for Fannie 
Mae and Freddie Mac, as of September 30, 2017, is presented in Table 7.

                Table 5--Fannie Mae and Freddie Mac Estimated Risk-Based Capital Requirements as of September 30, 2017--by Risk Category
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Fannie Mae capital            Freddie Mac capital       Enterprises' combined capital
                                                                      requirement                    requirement                    requirement
                                                            --------------------------------------------------------------------------------------------
                                                                                    Share                          Share                          Share
                                                             $billions     bps       (%)    $billions     bps       (%)    $billions     bps       (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Net Credit Risk............................................      $70.5  ........  ........      $41.5  ........  ........     $112.0  ........  ........
    Credit Risk Transferred................................     (11.5)  ........  ........     (10.0)  ........  ........     (21.5)  ........  ........
                                                            --------------------------------------------------------------------------------------------
Post-CRT Net Credit Risk...................................       59.0       176        51       31.5       142        48       90.5       162        50
Market Risk................................................        9.5        28         8        9.9        44        15       19.4        35        11
Going-Concern Buffer.......................................       24.0        72        21       15.9        71        24       39.9        72        22
Operational Risk...........................................        2.6         8         2        1.7         8         3        4.3         8         2
Other (DTA) * **...........................................       19.9        59        17        6.8        31        10       26.8        48        15
                                                            --------------------------------------------------------------------------------------------
    Total Capital Requirement..............................      115.0       343       100       65.9       296       100      180.9       324       100
                                                            --------------------------------------------------------------------------------------------
        Total Assets and Off-Balance Sheet Guarantees,         3,353.1  ........  ........    2,226.0  ........  ........    5,579.0  ........  ........
         $billions.........................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The DTA capital requirement is a function of Core Capital. Both Enterprises have negative Core Capital as of September 30, 2017. In order to calculate
  the DTA capital requirement, we assume Core Capital is equal to the Risk-Based Capital Requirement without consideration of the DTA capital
  requirement.
** Both Enterprises' DTAs were reduced in December 2017 as a result of the change in the corporate tax rate. The risk-based capital requirement for DTAs
  as of December 31, 2017 would be $10.0 billion or 30 bps for Fannie Mae and $1.2 billion or 5 bps for Freddie Mac. See Table 33 and Table 34 for more
  detail.


[[Page 33330]]


Table 6--Fannie Mae and Freddie Mac Combined Estimated Risk-Based Capital Requirements for the Enterprises as of
                                      September 30, 2017--by Asset Category
----------------------------------------------------------------------------------------------------------------
                                                                                Capital requirement
                                                                 -----------------------------------------------
                                                                     $billions         bps *         Share (%)
----------------------------------------------------------------------------------------------------------------
Single-family Whole Loans, Guarantees and Related Securities....          $130.5             273              72
Multifamily Whole Loans, Guarantees and Related Securities......            13.9             278               8
PLS.............................................................             3.4           2,336               2
CMBS............................................................            0.02             279               0
Other (DTA).....................................................            26.8             811              15
Other Assets....................................................             6.3             192               3
                                                                 -----------------------------------------------
    Total Capital Requirement...................................           180.9  ..............             100
----------------------------------------------------------------------------------------------------------------
* Basis points (bps) are calculated based on UPB of the respective asset category.


 Table 7--Fannie Mae and Freddie Mac Estimated Minimum Leverage Capital Requirement Alternatives as of September
                                                    30, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                     $billions
                                                                 -----------------------------------------------
                                                                                                    Enterprises
                                                                    Fannie Mae      Freddie Mac      combined
----------------------------------------------------------------------------------------------------------------
                                        2.5% Minimum Capital Alternative
----------------------------------------------------------------------------------------------------------------
2.5% Minimum Capital Alternative Requirement....................           $83.8           $55.6          $139.5
% of Total Assets and off-balance sheet guarantees..............            2.5%            2.5%            2.5%
----------------------------------------------------------------------------------------------------------------
                                     Bifurcated Minimum Capital Alternative
----------------------------------------------------------------------------------------------------------------
Bifurcated Minimum Capital Alternative Requirement..............           $60.4           $43.1          $103.5
% of Total Assets and off-balance sheet guarantees..............            1.8%            1.9%            1.9%
    Requirement for Non-Trust Assets............................           $16.1           $15.5           $31.6
    % of Non-trust Assets.......................................              4%              4%              4%
    Requirement for Trust Assets................................           $44.3           $27.6           $71.8
    % of Trust Assets...........................................            1.5%            1.5%            1.5%
                                                                 -----------------------------------------------
Total Assets plus off-balance sheet guarantees..................          $3,353          $2,226          $5,579
    Non-trust Assets............................................            $403            $388            $791
    Trust Assets................................................          $2,950          $1,838          $4,788
----------------------------------------------------------------------------------------------------------------

C. Risk-Based Capital Requirements

1. Overall Approach
    The proposed rule would establish risk-based capital requirements 
across five categories of the Enterprises' mortgage guarantees and 
portfolio holdings: (1) Single-family whole loans, guarantees, and 
related securities, (2) private-label mortgage-backed securities (PLS), 
(3) multifamily whole loans, guarantees, and related securities, (4) 
commercial mortgage-backed securities (CMBS), and (5) other assets. An 
additional category, ``Unassigned Assets,'' would provide an approach 
to assigning capital requirements to new products or activities that do 
not have an explicit treatment in this rule. Under this proposal, each 
of these asset and guarantee categories may include capital 
requirements for three kinds of risk: Credit risk, market risk, and 
operational risk. FHFA's proposal for the credit risk and market risk 
associated with the five asset and guarantee categories reflects the 
Agency's view about the relative risks of these assets. The proposed 
rule would also establish a risk-invariant capital requirement for 
operational risk that applies across all asset and guarantee 
categories. Lastly, the proposal would apply a going-concern buffer 
across all asset and guarantee categories.
    Each of the three risk categories (credit risk, market risk, and 
operational risk), in addition to the going-concern buffer, is further 
summarized below.
Credit Risk
    In evaluating the credit risk faced by the Enterprises, mortgage 
credit risk can be segmented into the following categories: (1) 
Expected loss; (2) unexpected loss; and (3) catastrophic loss. Expected 
losses result from the failure of some borrowers to make their payments 
during stable housing market conditions. Even in a stable and healthy 
housing market, some borrowers are likely to default on their loan as a 
result of certain life events such as illness, job loss, or divorce. 
Unexpected losses are the potentially much larger losses that could 
occur above expected losses should there be a stressful, yet plausible, 
macroeconomic event, such as a severe downturn in house price levels as 
might accompany a recession. For example, the credit losses that took 
place during the recent financial crisis and were in excess of the 
predicted loss amounts would be considered unexpected losses. 
Catastrophic losses are those losses beyond unexpected loss and would 
be deemed highly unlikely to occur. In general, losses beyond those 
experienced during the recent financial crisis would be considered 
catastrophic losses. However, there is not a bright line marking the 
transition from unexpected to catastrophic loss.
    For purposes of this proposed rule, FHFA defines the risk-based 
credit risk capital requirement for single-family and multifamily whole 
loans and guarantees as unexpected loss. As described above, these 
stress losses are forecasted under scenarios that are

[[Page 33331]]

generally comparable to stress experienced during the recent financial 
crisis. The proposed rule would calculate unexpected loss as the 
difference in the present value of lifetime losses under a stressful 
macroeconomic event scenario and lifetime losses under an expected 
scenario. Losses under the expected scenario (``expected losses'') are 
netted out from losses under the stressful macroeconomic event scenario 
(``stress losses'') in order to be consistent with other regulatory 
regimes. In particular, the loss scenarios draw on conceptual and 
methodological inputs from regulatory frameworks such as DFAST, CCAR, 
and the Basel Accords. The Enterprises set guarantee fees at a level to 
cover the lifetime cost of expected losses; therefore, there is no need 
for the Enterprises to hold capital for expected loss.
    The starting point of the proposed risk-based credit risk capital 
requirement for single-family and multifamily whole loans and 
guarantees would be implemented through a series of look-up tables 
(``grids and risk multipliers'') that take into account loan risk 
characteristics. The proposed rule would utilize look-up tables because 
they are simple and transparent, are easily implemented, and allow easy 
comparison to other capital standards by regulators and the public. As 
an alternative to the use of look-up tables to implement the risk-based 
credit risk capital requirement for single-family and multifamily whole 
loans, FHFA considered using collections of econometric equations 
(``models''), either the Enterprises' internal models or an FHFA-
specified model. FHFA determined that the use of a model would produce 
more nuanced results than the look-up tables, but would result in 
greater opacity and operational complexity. Furthermore, the use of the 
Enterprises' internal models for credit risk was rejected because it 
would result in inconsistent requirements between the Enterprises for 
assets with the same risk characteristics.
    The proposed rule would use lifetime losses, as opposed to using a 
shorter horizon, in calculating the credit risk capital requirement in 
order to fully capture any variation in losses due to differences in 
loan risk characteristics. For example, if a seven year horizon were 
used, the risk associated with the payment reset of a multifamily loan 
with a ten year interest-only period would not be captured in the 
credit risk capital requirement. Furthermore, the use of lifetime 
losses is more conservative than a requirement based on losses over a 
shorter horizon as it covers the unexpected losses over the lifetime of 
the loan.
    FHFA considered the inclusion of revenues into the credit risk 
capital requirements to reflect the fact that the Enterprises would be 
conducting new business and that vast majority of borrowers would 
continue to pay their mortgage even during a stressful macroeconomic 
event. For example, at the lowest point during the Great Recession, 
approximately 92 percent of borrowers with Enterprise guaranteed 
mortgages were current on their mortgages.\33\ On the other hand, FHFA 
believes there is greater benefit to having a risk-based capital 
requirement that ensures sufficient capital without considering new 
revenue. Inclusion of revenues could result in very low or zero risk-
based capital requirements for specific portfolio segments. FHFA also 
considered additional reasons for excluding revenues such as that Basel 
capital requirements exclude revenue, and that revenue serves to build 
capital during stress events so that the Enterprises can continue as 
going concerns.
---------------------------------------------------------------------------

    \33\ February 2010 Foreclosure Prevention and Refinance Report.
---------------------------------------------------------------------------

    The proposed rule also would not incorporate the tax deductibility 
of losses in order to create a simple and transparent measure of risk 
and to maintain general consistency with other regulatory regimes. 
Inclusion of the tax deductibility of losses would add significant 
complexity to the proposed rule. Additionally, FHFA already has an 
assessment of capitalization, the annual Dodd-Frank Act Stress Test 
exercise which incorporates revenue, the tax deductibility of losses 
and accounting impacts.
    Question 1: FHFA is soliciting comments on all aspects of the 
proposed risk-based capital framework. What modifications to the 
proposed risk-based capital framework should be considered and why?
Market Risk
    The Enterprises are exposed to market risk, including interest rate 
risk and spread risk, through their ownership of whole loans and their 
investments in MBS. Interest rate risk is the risk of loss from adverse 
changes in the value of the Enterprises' assets or liabilities due to 
changes in interest rates. Spread risk is the risk of a loss in value 
of an asset relative to a risk free or funding benchmark due to changes 
in perceptions of performance or liquidity. The Enterprises have 
historically actively managed interest rate risk but have not fully 
hedged spread risk.
    The proposed rule would establish risk-based capital requirements 
for the market risk associated with single-family whole loans, 
multifamily whole loans, single-family mortgage-backed securities (MBS) 
and collateralized mortgage obligations (CMOs), Government National 
Mortgage Association (Ginnie Mae) single-family and multifamily MBS, 
PLS, commercial mortgage-backed securities (CMBS), and other assets 
with market risk exposure held in the Enterprises' respective retained 
portfolios. While the Enterprises have legacy assets acquired prior to 
entering conservatorship, such as certain private-label securities 
investments, the ongoing use of the Enterprises' retained portfolios 
during conservatorship is now limited to transactions that support the 
Enterprises' core mortgage guarantee business activities. This includes 
supporting acquisitions through the cash window primarily for smaller 
lenders and buying delinquent loans out of securities in order to 
facilitate loss mitigation activities that benefit both borrowers and 
taxpayers. Because the Enterprises' retained portfolio activities have 
been greatly limited through conservatorship, these portfolios now 
represent a small share of the Enterprises' overall risk exposure, and 
the proposed methodology for calculating market risk capital 
requirements is therefore simple and straightforward. Although FHFA 
will automatically suspend a final rule because the Enterprises are in 
conservatorship and cannot build capital, the proposed rule is only 
intended to address market risks for the Enterprises as they are 
currently established under conservatorship. In a post-conservatorship 
housing finance system, FHFA may consider additional methodologies for 
calculating market risk capital requirements, and FHFA would have the 
regulatory flexibility to undertake such actions outside the scope of 
this proposed rulemaking.
    The primary target of the risk-based capital requirement for market 
risk would be spread risk, as the Enterprises closely hedge interest 
rate risk at the portfolio level through the use of callable debt and 
derivatives. Spread risk is a loss in value of an asset relative to a 
risk free or funding benchmark. Generally, spread risk is calculated by 
multiplying the amount of spread widening by the spread duration of the 
asset. Spread widening is typically based on historical spread shocks. 
Spread duration, or the sensitivity of the market value of an asset to 
changes in the spread, is determined by using

[[Page 33332]]

models that involve assumptions about interest rate movements and 
prepayment sensitivity. Prepayment sensitivity reflects the 
relationship between the volume and timing of cash flows and changes in 
the interest rate or the spread.
    The proposed rule would establish three approaches to determining 
the risk-based market risk capital requirement, each tailored to the 
Enterprises' businesses. The first approach defines market risk capital 
as a single point estimate provided by the proposed rule. The second 
approach is a spread duration approach that defines market risk capital 
by multiplying a spread shock, provided by the proposed rule, by a 
spread duration generated from an Enterprise's internal models. The 
third approach defines market risk capital through the exclusive use of 
an Enterprise's internal models. The proposed rule would assign the 
Enterprises' assets to one of the three approaches based on: (i) 
Whether the asset belongs to a small and declining portfolio where 
acquisition is limited as the result of conservatorship, (ii) the 
relative importance of market risk to credit risk for the asset, and 
(iii) the complexity of the product structure or prepayment 
sensitivity.
    In general, the proposed rule would assign the simplified single 
point estimate to assets that are either (i) part of a small and 
declining portfolio or (ii) where credit risk is the predominant risk. 
A single point estimate, while simple, may inadequately capture the 
market risk attributes for assets with complex structures or products 
with high prepayment sensitivity. For instance, assets with complex 
structures, such as CMOs, can have different prepayment risk across 
different tranches, and products with high prepayment sensitivity can 
have spread durations varying across a wide range of characteristics.
    For products with complex structures or high prepayment 
sensitivity, market risk capital results that rely on internal model 
calculations (the second and third approaches) could provide more 
accurate market risk capital estimates when compared with a single 
point estimate. Therefore, the proposed rule would rely on an 
Enterprise's internal models only when the market risk complexity is 
sufficiently high that using a single point estimate would inadequately 
represent the product's underlying market risk.
    Market risk capital requirements resulting from the Enterprises' 
internal models are derived under an established model risk management 
governance process that includes FHFA's supervisory review. In 
particular, FHFA issues advisory bulletins, which are public documents 
that communicate FHFA's supervisory expectations to FHFA supervision 
staff and to the Enterprises on specific supervisory matters and 
topics. In addition, through FHFA's supervision program, FHFA on-site 
examiners conduct supervisory activities to ensure safe and sound 
operations of the Enterprises. These supervisory activities may include 
the examination of the Enterprises to determine whether they meet the 
expectations set in the advisory bulletins. Examinations may also be 
conducted to determine whether the Enterprises comply with their own 
policies and procedures, regulatory and statutory requirements, or FHFA 
directives.
    FHFA's 2013-07 Advisory Bulletin reflects supervisory expectations 
for an Enterprise's model risk management. The Advisory Bulletin sets 
minimum thresholds for model risk management and differentiates between 
large, complex entities and smaller, less complex entities. As the 
Enterprises are large complex entities that develop and maintain 
internal market risk models, the Advisory Bulletin subjects them to 
heightened standards for internal audit, model risk management, model 
control framework, and model lifecycle management.
    Question 2: FHFA is soliciting comments on alternative approaches 
to determining market risk including using the global market shock 
component of DFAST, discussed in section I.G. Should alternative 
approaches be considered and why?
Operational Risk
    The proposed rule would establish a risk-invariant capital 
requirement for operational risk as discussed below. The operational 
risk capital requirement would be assessed as a fixed capital 
requirement on the unpaid principal balance of instruments with credit 
risk or on the market value of instruments with market risk. The Basel 
Basic Indicator Approach for operational risk would be used to 
determine the fixed capital requirement.
Going-Concern Buffer
    As also discussed below, the proposed rule would also establish a 
going-concern buffer to ensure the Enterprises have sufficient capital 
to support the mortgage markets during and after a period of severe 
financial stress. The going-concern buffer would be assessed as a fixed 
capital requirement on the unpaid principal balance of instruments with 
credit risk or on the market value of instruments with market risk.
    Question 3: FHFA is soliciting comments on the use of updated risk 
characteristics, including LTV and credit score, in the proposed risk-
based capital requirements, particularly as it relates to the pros and 
cons of having risk-based capital requirements with elements of pro-
cyclicality. Risk-based capital requirements that rely on inputs like 
house prices and loan risk characteristics that change over time have 
benefits and drawbacks. On the one hand, using updated risk 
characteristics such as performance history to determine risk-based 
capital requirements would result in a more accurate assessment of the 
risks faced by the Enterprises at any particular point in time within 
credit and economic cycles. On the other hand, using updated risk 
characteristics would result in pro-cyclical risk-based capital 
requirements, which may make it more difficult for the Enterprises to 
raise capital during periods of deteriorating credit or economic 
conditions.
    As discussed above, the proposed rule's approach of using mark-to-
market LTVs to determine credit risk capital requirements would more 
accurately represent the Enterprises' current risk profile than would 
using original LTVs. This is because the current value of a house 
influences both the probability that a homeowner will default on the 
mortgage and the magnitude of losses if a homeowner defaults. In times 
of house price appreciation mark-to-market LTVs would fall and credit 
risk capital requirements would decrease, while in times of house price 
depreciation mark-to-market LTVs would rise and credit risk capital 
requirements would increase. Therefore, not updating LTVs during a 
market downturn with decreasing house prices would, all else held 
constant, result in lower risk-based capital requirements relative to 
using mark-to-market LTVs. In such a scenario, not updating risk 
characteristics during a stress event could result in risk-based 
capital requirements being too low because original LTVs would be 
understated relative to current LTVs that account for decreased home 
values during the stress event. Whether using original LTVs or mark-to-
market LTVs, the proposed credit risk capital requirements in the base 
grids for new originations are designed to account for a decline in 
house prices comparable to the 2008 financial crisis.
    However, using original LTVs to determine credit risk capital 
requirements would reduce the pro-cyclicality of the proposed risk-
based

[[Page 33333]]

capital requirements and smooth out the Enterprises' credit risk 
capital requirements across economic and credit cycles, making the 
Enterprises' capital planning more predictable. Maintaining original 
LTVs for single-family loans would, for example, result in higher 
credit risk capital requirements during times of house price 
appreciation, such as the present time, relative to the proposed rule. 
Because the credit risk capital requirements in the proposed rule are 
determined using grids based on LTVs, if original LTVs were not updated 
over time credit risk capital requirements would not increase as a 
direct result of falling house prices during a market downturn.
    Comparing the use of constant or mark-to-market LTVs under the U.S. 
regulatory implementation of Basel III requires consideration of how 
the standardized approach and internal ratings-based approach interact 
with one another. The standardized approach maintains a 50 percent risk 
weight for mortgages and does not update this risk weight as house 
prices increase or decrease. The internal ratings-based approach 
allows, but does not require, institutions to use updated risk factors 
such as mark-to-market LTVs.
    Should FHFA consider reducing the pro-cyclicality of the proposed 
risk-based capital requirement? For example, should FHFA consider 
holding LTVs and/or other risk factors constant? What modifications or 
alternatives, if any, should FHFA consider to the proposed risk-based 
capital framework, and why?
    The next sections discuss the components of FHFA's proposed risk-
based capital requirements in more detail. This discussion begins with 
operational risk, which applies consistently across all of the 
Enterprises' mortgage loan/asset categories. The discussion continues 
with the proposed going-concern buffer, which would also apply 
consistently across all of the Enterprises' asset and guarantee 
categories. The following sections then discuss risk-based capital 
requirements for each asset and guarantee category, with subsections 
that address credit risk and market risk in detail along with summaries 
of the operational risk and going-concern buffer provisions.
2. Operational Risk
    The proposed rule would include an operational risk capital 
requirement of 8 basis points in the risk-based capital requirement. 
For assets and guarantees with credit risk, the 8 basis points would be 
multiplied by the unpaid principal balance of the asset or guarantee. 
For assets with market risk, the 8 basis points would be multiplied by 
the market value of the asset. For assets and guarantees with both 
credit and market risk, the 8 basis points would be multiplied by the 
unpaid principal balance.
    Operational risk is the risk of loss resulting from inadequate or 
failed internal processes, errors made by people and systems, or from 
external events. Operational risk is inherent in each Enterprise's 
business operations. Given the nature of such risks, it is challenging 
to quantify or estimate operational risk at the asset level. Under the 
Basel II framework, which requires banks to hold capital related to 
operational risk, there are three approaches used to measure the 
operational risk capital requirement: The Basic Indicator Approach, the 
Standardized Approach, and the Advanced Measurement Approach.\34\
---------------------------------------------------------------------------

    \34\ See the Basel Committee on Banking Supervision--
International Convergence of Capital Measurement and Capital 
Standards, June 2004.
---------------------------------------------------------------------------

    The Basic Indicator Approach is the simplest approach of the three, 
and it is generally used by banks without significant international 
operations. The Standardized Approach and the Advanced Measurement 
Approach employ increasing complexity for calculating operational risk 
capital requirements. The Advanced Measurement Approach is the most 
advanced approach and is subject to supervisory approval.\35\ In the 
proposed rule, FHFA uses the Basic Indicator Approach to calculate the 
operational risk capital requirement for the Enterprises, as it is 
simple and transparent, and it ensures a consistent treatment across 
the Enterprises.
---------------------------------------------------------------------------

    \35\ The Basel III framework replaces the collection of Basel II 
approaches used to measure operational risk with a single, risk-
sensitive standardized approach based on two components: (1) A 
measure of a bank's income, and (2) a measure of a bank's historical 
losses. The new standardized approach would be used by all banks. 
See https://www.bis.org/bcbs/publ/d424.htm.
---------------------------------------------------------------------------

    The Basic Indicator Approach requires banks to hold capital for 
operational risk equal to a fixed percentage (scalar) of the average 
positive gross income relative to total assets over the previous three 
years. The scalar of 15 percent is the fixed percentage set by the 
Basel Committee on Banking Supervision (BCBS), representing the 
prescribed relationship between operational risk loss and the aggregate 
level of gross income. The prescribed scalar of 15 percent is 
consistent with the percentage prescribed for the commercial banking 
business line under the Basel Standardized Approach. Gross income is 
defined as net interest income plus net non-interest income. The 
measure is gross of any provisions and operating expenses, and excludes 
realized profits or losses from the sale of securities and 
extraordinary or irregular items.
    As reflected in the table below, FHFA calculated the operational 
risk capital requirement for each Enterprise based on a three-year 
average of gross income from 2014 to 2016.

                                  Table 8--Operational Risk Capital Requirement
                                        [Three year average (2014-2016)]
----------------------------------------------------------------------------------------------------------------
                                                                                                     Weighted
                      Amounts in $billions                          Fannie Mae      Freddie Mac       average
----------------------------------------------------------------------------------------------------------------
(1) Gross consolidated income...................................           $17.9            $9.8  ..............
(2) Scalar......................................................             15%             15%  ..............
(3) Guarantee book of business..................................          $3,064          $1,954  ..............
                                                                 -----------------------------------------------
Capital Requirement (bps) = (1 x 2)/3...........................             8.7             7.5             8.2
----------------------------------------------------------------------------------------------------------------

The Basic Indicator Approach
    Banks using the Basic Indicator Approach must hold capital for 
operational risk equal to the average over the previous three years of 
a fixed percentage (denoted alpha) of positive annual gross income. 
Figures for any year in which annual gross income is negative or zero 
should be excluded from both the numerator and denominator when 
calculating the

[[Page 33334]]

average. The requirement may be expressed as follows:

KBIA = [[Sigma](GI1 . . . n x [alpha])]/n

Where:

KBIA = the capital requirement under the Basic Indicator Approach
GI = annual gross income, where positive, over the previous three 
years
n = number of the previous three years for which gross income is 
positive
[alpha] = 15 percent, which is set by the Committee, relating the 
industry wide level of required capital to the industry wide level 
of the indicator.

    Gross income is defined as net interest income plus net non-
interest income. It is intended that this measure should: (i) Be gross 
of any provisions (e.g., for unpaid interest); (ii) be gross of 
operating expenses, including fees paid to outsourcing service 
providers; (iii) exclude realized profits/losses from the sale of 
securities in the banking book; and (iv) exclude extraordinary or 
irregular items as well as income derived from insurance.
    FHFA combined the Enterprises' results to determine an operational 
risk capital requirement of 8 basis points.
    Question 4: FHFA is soliciting comments on the proposed operational 
risk capital requirements. Should FHFA consider requiring the 
Enterprises to calculate operational risk capital requirements using 
the new standardized approach for operational risk included in the 
Basel III framework? What additional modifications to the proposed 
operational risk capital requirements should be considered and why?
3. Going-Concern Buffer
    The proposed rule would include a going-concern buffer of 75 basis 
points in the risk-based capital requirement. For assets and guarantees 
with credit risk, the 75 basis points would be multiplied by the unpaid 
principal balance of the asset or guarantee. For assets or guarantees 
with market risk, the 75 basis points would be multiplied by the market 
value of the asset or guarantee. For assets and guarantees with both 
credit and market risk, the 75 basis points would be multiplied by the 
unpaid principal balance.
    The Enterprises are required by charter to provide liquidity to the 
mortgage markets during and after a period of severe financial stress. 
During a period of severe financial distress, the Enterprises would 
need capital to offset credit and market losses on their existing 
portfolios, to support the mortgage market by purchasing new loans, and 
more generally, to maintain market confidence in the Enterprises' 
securities. Losses on the Enterprises' existing portfolios would 
deplete capital and would incent the Enterprises to withdraw from 
riskier segments of the mortgage market in order to preserve capital. 
Raising new capital during a period of severe housing market stress, 
like that envisioned in this rule, would be very expensive, if not 
impossible; therefore, the proposed rule would require the Enterprises 
to hold additional capital on an on-going basis (``going-concern 
buffer'') in order to continue purchasing loans and to maintain market 
confidence during a period of severe distress.
    To quantify the size of the going-concern buffer, FHFA looked to 
the Enterprises' DFAST results for the severely adverse scenario. The 
DFAST severely adverse scenario specified by FHFA incorporates an 
assumption that the Enterprises will originate new business during the 
stress period. DFAST results reflect the impact of the stress scenario 
on the earnings and capital of each Enterprise.
    FHFA calculated the amount of capital necessary for the Enterprises 
to meet a 2.5 percent leverage requirement at the end of each quarter 
of the simulation of the severely adverse DFAST scenario (without DTA 
valuation allowance) and compared that amount to the aggregate risk-
based capital requirement. The difference between these two measures 
provided an indicator for the size of the going-concern buffer. FHFA 
ultimately determined that the size of the going-concern buffer should 
be 75 basis points and that the going-concern buffer would be risk-
invariant. This approach is useful because it includes a severe stress, 
an assumption of new business during the severe stress, and an 
assumption that an Enterprise has enough capital to meet its minimum 
leverage requirement during and at the end of the stress period, which 
should contribute to maintaining market confidence. As further 
validation of the proposed 75 basis points going-concern buffer, FHFA 
compared the capital obtained by applying the proposed going-concern 
buffer to the 2017 single-family book of business with the capital 
required to fund each Enterprise's 2017 new acquisitions. FHFA found 
the proposed going-concern buffer would provide sufficient capital for 
each Enterprise to fund an additional one to two years of new 
acquisitions comparable to their 2017 new acquisitions.
    Question 5: FHFA is soliciting comments on the proposed going-
concern buffer. What modifications to the proposed going-concern buffer 
should be considered and why?
4. Single-Family Whole Loans, Guarantees, and Related Securities
    This section corresponds to Proposed Rule Sec. Sec.  1240.5 through 
1240.23.
Overview
    The proposed rule would establish risk-based capital requirements 
for the Enterprises' single-family whole loans, guarantees, and 
securities held for investment. The core of the Enterprises' single-
family businesses is acquiring and packaging single-family loans into 
mortgage-backed securities (MBS) and providing credit guarantees on the 
issued securities. The aim of the proposed single-family capital 
requirements is to ensure the continued operation of these important 
single-family business operations throughout periods of economic 
uncertainty. In the context of the proposed rule, single-family whole 
loans are single-family mortgage loans acquired by the Enterprises and 
held in portfolio, including those purchased out of MBS trusts due to 
issues related to payment performance. Likewise, single-family 
guarantees are guarantees provided by the Enterprises of the timely 
receipt of principal and interest payments to investors in mortgage-
backed securities (MBS) that have been issued by the Enterprises and 
are backed by single-family mortgage loans. Except in cases where they 
transfer the risk to private investors, the Enterprises are exposed to 
credit risk through their ownership of single-family whole loans and 
guarantees issued on MBS. In addition, the Enterprises are exposed to 
market risk through their ownership of single-family whole loans and 
mortgage-backed securities held for investment purposes.
    To implement the proposed single-family capital requirements, the 
Enterprises would use a set of single-family grids and risk multipliers 
to calculate credit risk capital, as well as a collection of 
straightforward formulas to calculate market risk capital, operational 
risk capital, and a going-concern buffer.
    The proposed rule would first establish a framework through which 
the Enterprises would calculate their gross single-family credit risk 
capital requirements. The proposed methodology is simple and 
transparent, relying on a set of look-up tables (grids and risk 
multipliers) that would account for many important single-family risk 
factors in the calculation of gross credit risk capital requirements, 
including loan characteristics such as age, payment performance, loan-
to-value (LTV), and credit score.

[[Page 33335]]

    The proposed grid and multiplier framework is consistent with 
existing financial regulatory regimes, and would therefore facilitate 
comparison to those regimes and promote understanding of the 
framework's methodology and resulting capital requirements. In 
particular, the proposed rule is conceptually and methodologically 
similar to regulatory frameworks such as DFAST, CCAR, and the Basel 
Accords. FHFA believes that this straightforward and transparent 
approach, as opposed to one involving a complex set of credit models 
and econometric equations, would provide sufficient risk 
differentiation across the Enterprises' single-family businesses 
without obfuscating capital calculations or placing undue 
implementation and compliance burdens on the Enterprises.
    Next, the proposed rule would provide a mechanism through which the 
Enterprises would calculate net credit risk capital requirements for 
single-family whole loans and guarantees by accounting for the benefits 
associated with loan-level credit enhancements such as mortgage 
insurance, while also accounting for the counterparty credit risk 
associated with third parties such as mortgage insurance companies.
    The proposed rule would then provide a mechanism for the 
Enterprises to calculate capital relief by reducing net single-family 
credit risk capital requirements based on the amount of loss shared or 
risk transferred to private sector investors through the Enterprises' 
respective credit risk transfer programs. Collectively, the Enterprises 
engage in a variety of types of single-family credit risk transfer 
transactions, and this aspect of the proposed rule would account for 
differences in the Enterprises' single-family business models.
    The proposed rule would establish market risk capital requirements 
for single-family whole loans and mortgage-backed securities held for 
investment. The proposed methodology would account for spread risk 
using either simple formulas or the Enterprises' internal models, 
depending on the risk characteristics of the single-family whole loans 
or guarantees being considered.
    In addition, the proposed rule would establish an operational risk 
capital requirement for the Enterprises' single-family businesses that 
is invariant to risk. The proposed operational risk capital requirement 
is based on the Basel Basic Indicator Approach and would require the 
Enterprises to calculate operational risk capital as a fixed percentage 
of total unpaid principal balances or market values, depending on 
whether the Enterprises retain both credit and market risk for 
particular single-family assets or merely market risk.
    Finally, as described above, the proposed rule would establish a 
going-concern buffer for the Enterprises' single-family businesses that 
is also invariant to risk with the objective of ensuring that, when 
combined with Enterprise revenue, the Enterprises have sufficient 
capital to continue operating their single-family businesses during and 
after a period of severe financial distress. Under the proposed rule, 
the Enterprises would be required to calculate the single-family going-
concern buffer as a fixed percentage of total unpaid principal balances 
or market values, depending on whether the Enterprises retain both 
credit and market risk for particular single-family assets or merely 
market risk.
Single-Family Business Model
    The proposed rule would apply equally to both Enterprises 
regardless of differences in their single-family business models. 
Although the Enterprises operate independently of one another, the 
common core of their single-family businesses is the acquisition of 
single-family mortgage loans from mortgage companies, commercial banks, 
credit unions, and other financial institutions, packaging those loans 
into mortgage-backed securities (MBS), and selling the MBS either back 
to the original lenders or to other private investors in exchange for a 
fee that represents a guarantee of timely principal and interest 
payments on those securities.
    The Enterprises engage in the acquisition and securitization of 
single-family mortgages primarily through two types of transactions: 
Lender swap transactions and cash window transactions. In a lender swap 
transaction, lenders pool similar single-family loans together and 
deliver the pool of loans to an Enterprise in exchange for an MBS 
backed by those single-family mortgage loans, which the lenders 
generally then sell in order to use the proceeds to fund more mortgage 
loans. In a cash window transaction, an Enterprise purchases single-
family loans from a large, diverse group of lenders and then 
securitizes the acquired loans into an MBS to sell at a later date. For 
MBS issued as a result of either lender swap transactions or cash 
window transactions, the Enterprises provide investors with a guarantee 
of the timely receipt of payments in exchange for a guarantee fee. 
Single-family loans that have been purchased but have not yet been 
securitized are held in the Enterprises' whole loan portfolios. In 
addition, the Enterprises also repurchase loans that have been 
delinquent for four or more consecutive months from the MBS they 
guarantee.
    The Enterprises are exposed to credit risk through their ownership 
of single-family whole loans and the guarantees they issue on MBS. The 
Enterprises may incur a credit loss when borrowers default on their 
mortgage payments, so the Enterprises attempt to mitigate the 
likelihood of incurring such a loss in a variety of ways. One way to 
reduce potential credit losses is through the use of credit 
enhancements such as primary mortgage insurance. Credit enhancement is 
required by the Enterprises' charter acts for single-family loans with 
loan-to-value ratios over 80 percent.\36\ In addition to loan-level 
credit enhancements, the Enterprises may, and indeed often do, engage 
in pool-level credit risk transfer transactions (CRT) in order to 
transfer a portion of their retained single-family credit risk to 
investors.
---------------------------------------------------------------------------

    \36\ The charter acts permit three types of credit enhancement 
for such high-LTV loans, but private mortgage insurance is by far 
the most commonly used.
---------------------------------------------------------------------------

Rule Framework and Implementation
    The proposed rule would establish risk-based capital requirements 
for the Enterprises' single-family businesses, including requirements 
for their whole loans, guarantees, and securities held for investment. 
Using the proposed requirements, the Enterprises would calculate the 
minimum amount of funds needed to continue their single-family business 
operations under stressed economic conditions, as discussed in detail 
below. The proposed single-family capital requirements would have the 
following components: Credit risk capital, including relief for credit 
risk transfers; market risk capital; operational risk capital; and a 
going-concern buffer. Each component is discussed in detail in the 
ensuing subsections.
a. Credit Risk
    This section corresponds to Proposed Rule Sec. Sec.  1240.5 through 
1240.13.
Single-Family Whole Loans and Guarantees
    The proposed rule would establish credit risk capital requirements 
for the Enterprises' conventional single-family whole loans and 
guarantees. For reasons discussed below, loans with a government 
guarantee would not be subject to the credit risk capital requirement. 
The single-family credit risk capital requirements would

[[Page 33336]]

determine the minimum funding necessary to cover the difference between 
estimated lifetime credit losses in severely adverse economic 
conditions (alternatively referred to as stress losses) and expected 
losses. As adverse economic conditions are not explicitly defined, the 
loss projections that underpin the credit risk capital requirements in 
the proposed rule are based on several different economic scenarios.
    Each Enterprise used economic scenarios that they defined to 
project loan-level credit risk capital. In addition, FHFA leveraged the 
baseline and severely adverse scenario defined in the Dodd-Frank Act 
Stress Tests (DFAST) to project expected and stress losses. The DFAST 
scenarios are well understood economic conditions updated annually by 
the Federal Reserve Board. FHFA used these pre-existing scenarios as a 
starting point for its estimations in order to provide economic 
scenarios consistent with those issued by other regulators to large 
financial institutions for stress tests required under DFAST. FHFA also 
used these scenarios to ensure a straightforward, transparent approach 
to the proposed rule's capital requirements. The DFAST scenarios 
include forecasts for macroeconomic variables including home prices, 
interest rates, and unemployment rates.
    Home prices are generally considered to be the most important 
determinant of a strong single-family housing market. Home prices are 
used to define the loan-to-value ratio, where the likelihood of a loss 
occurring upon default increases as the proportion of equity to loan 
value deceases. Therefore, the projected home price path is the 
predominant macroeconomic driver for the requirements single-family 
stress scenarios.
    The Enterprises used similar house price paths to project credit 
risk capital. In the stress scenarios used by FHFA and the Enterprises, 
nationally averaged home prices declined by 25 percent from peak to 
trough (the period of time between the shock and the recovery), which 
is consistent with the decline in home prices observed during the 
recent financial crisis. The 25 percent home price decline is also 
consistent with assumptions used in the DFAST severely adverse scenario 
over the past several years, although the 2017 DFAST cycle assumes a 30 
percent home price decline in its severely adverse scenario. However, 
the trough and recovery assumptions used by FHFA and the Enterprises 
are somewhat more conservative than the observed house price recoveries 
post crisis. The single-family credit risk capital grids, discussed 
below, reflect estimations of stress losses and expected losses under 
these severely adverse economic conditions.
    The proposed rule would require the Enterprises to calculate credit 
risk capital requirements for single-family whole loans and guarantees 
by completing the following simplified steps:
    (1) Determine base single-family credit risk capital requirements 
using single-family-specific credit risk capital grids;
    (2) Determine gross single-family credit risk capital requirements 
by adjusting base single-family credit risk capital requirements for 
additional risk characteristics using a set of single-family-specific 
risk multipliers;
    (3) Determine net single-family credit risk capital requirements by 
adjusting gross single-family credit risk capital requirements for 
loan-level credit enhancements, including accounting for counterparty 
risk; and
    (4) Determine capital relief from net single-family credit risk 
capital requirements due to credit risk transfer transactions.
Base Credit Risk Capital Requirements
    This section corresponds to Proposed Rule Sec. Sec.  1240.5 through 
1240.16.
    The proposed rule would require the Enterprises to calculate base 
credit risk capital requirements for single-family whole loans and 
guarantees using a set of five look-up tables or grids, one for each 
single-family loan segment. Accordingly, for the purpose of the 
proposed rule, the Enterprises would categorize their single-family 
whole loans and guarantees into five loan segments, with each loan 
segment representing a different period in the possible life cycle of a 
single-family mortgage loan.
    The proposed single-family loan segments are based on age and 
payment performance because the expectation of a credit loss depends 
heavily on these two risk factors. Additional risk factors affect the 
expectation of credit loss differently depending on where a loan is in 
its life cycle. The amount of credit risk capital required for a 
single-family whole loan or guarantee therefore would change over the 
life cycle of a loan, decreasing when the loan is seasoned and 
performing, and increasing when the loan is delinquent or has recently 
experienced delinquency. These dynamics are often captured in credit 
loss forecasts by estimating different mortgage performance equations 
for loans in different life-cycle stages. The proposed rule would 
capture these dynamics in a similar fashion by having five different 
single-family credit risk capital grids and sets of multipliers for 
whole loans and guarantees in different life-cycle stages. The five 
proposed loan segments for single-family whole loans and guarantees 
are:
    <bullet> New originations: Loans that were originated within 5 
months of the capital calculation date and have never been 30-days 
delinquent. Streamlined refinance loans, including HARP loans, are 
excluded from this category.
    <bullet> Performing seasoned: Loans that were originated at least 5 
months before the capital calculation date and have been neither 30-
days delinquent nor modified within 36 months of the capital 
calculation date. Newly originated streamlined refinance loans, 
including HARP loans, are included in this category.
    <bullet> Non-modified re-performing: Loans that are currently 
performing and have had a prior 30-day delinquency, but not a prior 
modification.
    <bullet> Modified re-performing: Loans that are currently 
performing and have had a prior 30-day delinquency and a prior 
modification.
    <bullet> Non-performing: Loans that are currently at least 30-days 
delinquent.
    Each single-family loan segment would have a unique two-dimensional 
credit risk capital grid that the Enterprises would use to calculate 
base credit risk capital requirements for every whole loan and 
guarantee in the loan segment. The dimensions of the credit risk 
capital grids would vary by loan segment to allow the grids to 
differentially incorporate key risk drivers into the base credit risk 
capital requirements on a segment-by-segment basis. For example, 
current (refreshed) credit scores and mark-to-market LTV (MTMLTV) are 
two primary drivers of credit losses in performing seasoned loans, 
while a primary driver of credit losses in modified re-performing loans 
(RPL) is the payment change due to modification. Accordingly, the 
dimensions of the credit risk capital grids for these segments would 
reflect the respective primary drivers of risk.
    The credit risk capital grid for each single-family loan segment 
would determine the base credit risk capital requirement for any 
single-family whole loan or guarantee in that loan segment (where the 
base credit risk capital requirement refers to a capital calculation 
that does not yet recognize either the full impact of risk factors that 
are not one of the base grid's two dimensions or loan-level credit 
enhancements). The proposed grids were populated after carefully 
considering a combination of estimates

[[Page 33337]]

of credit risk capital from the Enterprises' internal models and FHFA's 
models. To derive the underlying estimates for each loan segment's 
credit risk capital grid, the Enterprises were asked to run their 
single-family credit models using comparable stressed economic 
conditions, as discussed above, and synthetic loans with a baseline 
risk profile with respect to risk factors other than those represented 
in the dimensions of the segment's credit risk capital grid.\37\ In the 
proposed rule, each single-family loan segment has its own baseline 
risk profile, which is discussed segment-by-segment below. 
Consequently, each cell of the single-family credit risk capital grids 
represents an estimated difference, in basis points, between estimated 
stress losses and expected losses for a segment-specific, baseline 
synthetic loan with a particular combination of primary risk factors as 
described in the grid's dimensions. In the proposed rule, this capital 
requirement, in basis points, would be applied to the unpaid principal 
balance (UPB) of each conventional single-family whole loan and 
guarantee held by the Enterprises with exposure to credit risk.
---------------------------------------------------------------------------

    \37\ In the context of this rule, a baseline risk profile means 
that the secondary risk factors included in each baseline synthetic 
loan take values such that they would receive a risk multiplier of 
1.0, as discussed further in section II.C.4.a.
---------------------------------------------------------------------------

    FHFA believes that constructing the proposed base credit risk 
capital grids in this manner provides for sufficient levels of 
granularity, accuracy, and transparency in the credit risk capital 
calculations. Each single-family whole loan and guarantee is segmented 
first by age and payment performance, then broken down further by its 
two primary risk drivers while simultaneously considering ``typical'' 
values for secondary risk drivers (which are further accounted for in 
the calculation of gross credit risk capital requirements using risk 
multipliers). FHFA carefully evaluated its own model estimations using 
these categorizations, as well as estimations provided by the 
Enterprises. The credit risk capital requirements in the five proposed 
grids do not take into account the effect of credit enhancements such 
as mortgage insurance and generally represent averages of the 
individual estimations, although in certain cases adjustments were made 
to ensure the capital requirements were reasonable. In addition, the 
risk factor breakpoints and ranges represented in the grids' dimensions 
were chosen in light of FHFA analysis and internal discussions, as well 
as discussions with the Enterprises. FHFA concluded that the proposed 
breakpoints and ranges would combine to form sufficiently granular 
pairwise buckets without imposing an undue compliance burden on the 
Enterprises. The proposed process for calculating credit risk capital 
requirements is therefore straightforward, and does not rely on 
quarterly calculations of complicated, opaque economic models or 
econometric equations.
Base Credit Risk Capital Grids by Loan Segment
New Originations
    The primary risk factors for single-family whole loans and 
guarantees in the new originations loan segment are original credit 
score and original loan-to-value (OLTV). The dimensions in the 
segment's credit risk capital grid would reflect these two risk 
factors. Original credit score correlates strongly with the probability 
of a borrower default, while OLTV relates to the severity of a 
potential loss should a borrower default (loss given default). Credit 
score and OLTV are often used by lenders to price new loans.
    The proposed single-family credit risk capital grid for new 
originations is presented in Table 9.
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    Credit scores have values ranging from 300 to 850, and LTVs at 
origination typically range from 10 percent to 97 percent. FHFA chose 
the ranges and breakpoints represented in the dimensions of the Table 9 
after reviewing the distributions of unpaid principal balances in the 
Enterprises' single-family businesses. FHFA notes that the Enterprises 
currently rely on Classic FICO for product eligibility, loan pricing, 
and financial disclosure purposes, and therefore the base grid for new 
originations was estimated using Classic FICO credit scores.\38\ 
Furthermore, throughout the proposed rule, the use of credit scores 
should be interpreted to mean Classic FICO credit scores. If the 
Enterprises were to begin using a different credit score for these 
purposes, or multiple scores, the grid for new originations, along with 
any other grid reliant on credit scores, would need to be recalibrated. 
In the proposed grid for new originations, OLTV ranges are more 
granular between OLTVs of 70 and

[[Page 33339]]

95 percent, where the Enterprises conduct the majority of their new 
single-family businesses. In addition, the credit risk capital grid for 
new originations has a separate category for loans with an 80 percent 
OLTV to account for the high volume and distinct features of these 
particular loans. Under the Enterprises' charter acts, 80 percent 
represents the maximum LTV for which loans do not require credit 
enhancement, which creates an incentive for borrowers to finance 
exactly 80 percent of a home's value. The grid in Table 9 presents 
proposed capital requirements before taking into account credit 
enhancements such as mortgage insurance, which would lower the 
Enterprises' net capital requirements for single-family loans with an 
OLTV greater than 80 percent. For example, for a single-family 30-year 
amortizing loan with guide-level mortgage insurance coverage and an 
OLTV of 93 percent, mortgage insurance would reduce the Table 9 gross 
credit risk capital requirement by 69 percent (see Table 15) prior to 
counterparty haircut adjustments. Subsequent tables 10 through 13 are 
also presented before taking into account credit enhancements.
---------------------------------------------------------------------------

    \38\ FHFA has issued a Request for Input on Fannie Mae and 
Freddie Mac Credit Score Requirements. See https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Issues-Request-for-Input-on-Fannie-Mae-and-Freddie-Mac-Credit-Score-Requirements.aspx.
---------------------------------------------------------------------------

    Aside from the primary risk factors represented in the dimensions 
of Table 9, there are several secondary risk factors accounted for in 
the risk profile of the synthetic loan used in the estimations 
underlying the credit risk capital requirements presented in Table 9. 
Those secondary risk factors, along with the values that determine the 
baseline risk profile for the credit risk capital grid for new 
originations, are as follows: Loan age less than six months, 30-year 
fixed rate, purchase, owner-occupied, single-unit, retail channel 
sourced, debt-to-income ratio between 25 percent and 40 percent, loan 
size greater than $100,000, no second lien, and has multiple borrowers. 
Variations from these risk characteristics would make the whole loan or 
guarantee more or less risky and would result in a higher or lower 
credit risk capital requirement relative to the base credit risk 
capital requirement. In the proposed rule, variations in these 
secondary risk factors would be captured using risk multipliers as 
described in the next section.
Performing Seasoned Loans
    The primary risk factors for single-family whole loans and 
guarantees in the performing seasoned loan segment are refreshed credit 
score and mark-to-market loan-to-value (MTMLTV). The dimensions in the 
segment's credit risk capital grid would reflect these two risk 
factors. The more seasoned a loan gets, or the longer it has been since 
the loan was originated, the less relevant its original credit score 
and original LTV become.
    But since credit score and LTV still relate strongly to the 
probability of default and loss given default, respectively, refreshed 
(updated) values of these two important risk factors are used as the 
primary risk factors and dimensions. The proposed single-family credit 
risk capital grid for whole loans and guarantees in the performing 
seasoned loan segment is presented in Table 10.
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BILLING CODE 8070-01-C
    Credit scores have values ranging from 300 to 850, and MTMLTVs 
typically range from 10 percent to upwards of 120 percent. FHFA chose 
the ranges and breakpoints represented in the dimensions of the Table 
10 after reviewing the distributions of unpaid principal balances in 
the Enterprises' single-family seasoned loan businesses. In the 
proposed credit risk capital grid for performing seasoned loans, FHFA 
included MTMLTV buckets beyond 95 percent to account for adverse 
changes in home prices subsequent to loan origination, as well as to 
account for the inclusion of streamlined refinance loans in the 
segment. In addition, loans with an 80 percent LTV are no longer 
highlighted.
    Aside from the primary risk factors represented in the dimensions 
of Table 10, there are several secondary risk factors accounted for in 
the risk profile of the synthetic loans used in the estimations 
underlying the credit risk capital requirements presented in Table 10. 
Those secondary risk factors, along with the values that determine the 
baseline risk profile for the credit risk capital grid for performing 
seasoned loans, are: Loan age between six months and 12 months, 30-year 
fixed rate,

[[Page 33341]]

purchase, owner-occupied, single-unit, retail channel sourced, debt-to-
income ratio between 25 percent and 40 percent, loan size greater than 
$100,000, no second lien, has multiple borrowers, full documentation 
for documentation level, non-interest-only for amortization type, not 
streamlined refinance loans, and zero refinance (cohort) burnout 
(described below). Several of these risk factors, such as documentation 
level, interest-only, and those related to refinancing, are included in 
the performing seasoned loan segment despite the fact that they are not 
included in the new originations segment, in some cases due to the 
Qualified Mortgage rule that prohibits interest-only and low-
documentation loans on new originations. However, these risk factors 
may be present on loan originated prior to the financial crisis. 
Variations from these risk characteristics would make the whole loan or 
guarantee more or less risky and would result in a higher or lower 
credit risk capital requirement relative to the base credit risk 
capital requirement. In the proposed rule, variations in these 
secondary risk factors would be captured using risk multipliers as 
described in the next section.
Non-Modified Re-Performing Loans
    The primary risk factors for single-family whole loans and 
guarantees in the non-modified re-performing loan segment are re-
performing duration and MTMLTV. The dimensions in the segment's credit 
risk capital grid would reflect these two risk factors. Re-performing 
duration is the number of months since a whole loan or guarantee was 
last delinquent, and is a strong predictor of the likelihood of a 
subsequent default for re-performing loans that have cured without 
prior modifications. MTMLTV is a strong predictor of loss given default 
for whole loans and guarantees in this segment.
    The proposed single-family credit risk capital grid for whole loans 
and guarantees in the non-modified re-performing loan segment is 
presented in Table 11.
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BILLING CODE 8070-01-C
    In the proposed rule, re-performing duration is divided into four 
categories such that credit risk capital requirements would decrease as 
re-performing duration increases. When the re-performing duration is 
greater than three years, the proposed credit risk capital requirement 
for a re-performing loan would approximate the credit risk capital 
requirements for a performing seasoned loan. Loans that re-perform for 
greater than four years, and have not been modified, would revert to 
being classified as performing seasoned and use the appropriate credit 
risk capital grid. The proposed ranges and breakpoints for MTMLTV are 
unchanged from those found in the performing seasoned loan grid (Table 
10).
    Aside from the primary risk factors represented in the dimensions 
of Table 11, there are many secondary risk factors accounted for in the 
risk profile of the synthetic loan used in the estimations underlying 
the credit risk

[[Page 33343]]

capital requirements presented in Table 11. In particular, although 
much of the predictive power of current credit score is captured by re-
performing duration, variations in credit score are still accounted for 
through a multiplier. These secondary risk factors, along with the 
values that determine the baseline risk profile for the credit risk 
capital grid for non-modified re-performing loans, are the same as 
those for performing seasoned loans with the inclusion of two 
additional features: Refreshed credit scores between 660 and 700, and a 
maximum previous delinquency of one month. Variations from these risk 
characteristics would make the whole loan or guarantee more or less 
risky and would result in a higher or lower credit risk capital 
requirement relative to the base credit risk capital requirement. In 
the proposed rule, variations in these secondary risk factors would be 
captured using risk multipliers as described in the next section.
Modified Re-Performing Loans
    The primary risk factors for single-family whole loans and 
guarantees in the modified re-performing loan segment are similar to 
those in the non-modified re-performing loan segment. However, along 
with the MTMLTV, the second primary risk factor in the modified re-
performing segment is either the re-performing duration or the 
performing duration, whichever is smaller. The re-performing duration 
measures the number of months since the last delinquency, while the 
performing duration measures the number of months a loan has been 
performing since it was last modified. The dimensions in the segment's 
credit risk capital grid would reflect these risk factors.
    The proposed single-family credit risk capital grid for whole loans 
and guarantees in the modified re-performing loan segment is presented 
in Table 12.
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BILLING CODE 8070-01-C
    Aside from the primary risk factors represented in the dimensions 
of Table 12, there are many secondary risk factors accounted for in the 
risk profile of the synthetic loan used in the estimations underlying 
the credit risk capital requirements presented in Table 12. These 
secondary risk factors, along with the values that determine the 
baseline risk profile for the credit risk capital grid for modified re-
performing loans, are the same as those for non-modified re-performing 
loans. Variations from these risk characteristics would make the whole 
loan or guarantee more or less risky and would result in a higher or 
lower credit risk capital requirement relative to the base credit risk 
capital requirement. In the proposed rule, variations in these 
secondary risk factors would be captured using risk multipliers as 
described in the next section.
    Contrary to re-performing single-family loans that have not been 
modified, loans in the modified re-

[[Page 33345]]

performing loan segment never revert to being classified as performing 
seasoned loans, even after four or more years of re-performance.
Non-Performing Loans
    The primary risk factors for single-family whole loans and 
guarantees in the non-performing loan (NPL) segment are delinquency 
level and MTMLTV. The dimensions in the segment's credit risk capital 
grid would reflect these two risk factors. In the proposed rule, a non-
performing single-family loan is a loan where at least the most recent 
payment has been missed. The delinquency level of a non-performing 
whole loan or guarantee is the number of payments missed since the loan 
became delinquent, and is a strong predictor of the likelihood of 
default for non-performing loans. MTMLTV is a strong predictor of loss 
given default for whole loans and guarantees in this segment. The 
proposed single-family credit risk capital grid for whole loans and 
guarantees in the non-performing loan segment is presented in Table 13.

                                          Table 13--Single-Family Non-Performing Loans Base Credit Risk Capital
                                                                        [In bps]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  30% <        60% <        70% <        75% <        80% <        85% <
                                                   MTMLTV <=    MTMLTV <=    MTMLTV <=    MTMLTV <=    MTMLTV <=    MTMLTV <=    MTMLTV <=     MTMLTV >
                                                      30%          60%          70%          75%          80%          85%          90%          90%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Missed Payments:
    1...........................................           46          387        1,054        1,195        1,300        1,404        1,496        1,663
    2...........................................           60          507        1,233        1,374        1,462        1,535        1,612        1,695
    3-6.........................................           80          603        1,315        1,437        1,503        1,556        1,600        1,638
    >=7.........................................          198          884        1,565        1,619        1,650        1,659        1,667        1,577
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The capital requirements detailed in Table 13 are non-monotonic as 
the number of missed payments increases, particularly in the highest 
(right-most) MTMLTV column. This is because as the number of missed 
payments increases for a non-performing loan with a very high LTV, so 
does the expected loss. Because capital is defined as the difference 
between stress loss and expected loss, when expected loss increases and 
grows closer to stress loss, the capital requirement shrinks. The 
increase in expected loss is reflected in commensurately higher loss 
reserves.
    Aside from the primary risk factors represented in the dimensions 
of Table 13, there are many secondary risk factors accounted for in the 
risk profile of the synthetic loan used in the estimations underlying 
the credit risk capital requirements presented in Table 13. These 
secondary risk factors, along with the values that determine the 
baseline risk profile for the credit risk capital grid for non-
performing loans, are the same as those for performing seasoned loans, 
with the inclusion of one additional feature: Refreshed credit scores 
between 640 and 700. Variations from these risk characteristics would 
make the whole loan or guarantee more or less risky and would result in 
higher or lower credit risk capital requirement relative to the base 
credit risk capital requirement. In the proposed rule, variations in 
these secondary risk factors would be captured using risk multipliers 
as described in the next section.
Gross Credit Risk Capital Requirements
    After the Enterprises calculate base credit risk capital 
requirements for single-family whole loans and guarantees using the 
single-family credit risk capital grids, the proposed rule would 
require the Enterprises to calculate gross credit risk capital 
requirements by adjusting the base credit risk capital requirements to 
account for additional loan characteristics using a set of single-
family-specific risk multipliers. The proposed risk multipliers would 
refine single-family base credit risk capital requirements to account 
for risk factors beyond the primary risk factors reflected in the 
credit risk capital grids, and for variations in secondary risk factors 
not captured in the risk profiles of the synthetic loans underlying the 
credit risk capital grids. Gross single-family credit risk capital 
requirements would be the product of base single-family credit risk 
capital requirements and the single-family risk multipliers.
    The proposed single-family risk multipliers represent common 
characteristics that increase or decrease the riskiness of a single-
family whole loan or guarantee. Therefore, the proposed rule would 
provide a mechanism through which single-family credit risk capital 
requirements would be adjusted and refined up or down to reflect a more 
or less risky loan profile, respectively. FHFA believes that risk 
multipliers would provide for a simple and transparent characterization 
of the risks associated with different types of single-family whole 
loans and guarantees, and an effective way of adjusting credit risk 
capital requirements for those risks. Although the specified risk 
characteristics are not exhaustive, they capture key real estate loan 
performance drivers, and are commonly used in mortgage loan 
underwriting and rating. For these reasons, FHFA believes the use of 
risk multipliers in general, and the proposed risk multipliers in 
particular, would facilitate analysis and promote understanding of the 
Enterprises' single-family credit risk capital requirements while 
mitigating concerns associated with compliance and complex 
implementation.
    The proposed risk multiplier values were determined using FHFA 
staff analysis and expertise, and in consideration of the Enterprises' 
contribution of model results and business expertise. To derive the 
proposed risk multiplier values, the Enterprises were asked to run 
their single-family credit models using comparable stressed economic 
conditions, as discussed above, and synthetic loans with a baseline 
risk profile with respect to risk factors other than those represented 
in the dimensions of each segment's credit risk capital grid. The 
segment-specific secondary risk factors, and their segment-specific 
baseline risk values, are discussed in detail in the prior section. The 
Enterprises then varied the secondary risk factors, by loan segment, to 
estimate each risk factor's multiplicative effects on the Enterprises' 
base credit risk capital projections (stress losses minus expected 
losses) for baseline whole loans and guarantees in each loan segment. 
FHFA then considered the multiplier values estimated by the 
Enterprises, which were generally consistent in magnitude and 
direction, in conjunction with its

[[Page 33346]]

own estimated values before combining values to determine the proposed 
single-family risk multipliers. The proposed single-family risk 
multipliers are presented in Table 14.

                                                        Table 14--Single-Family Risk Multipliers
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          Risk multipliers by single-family loan segment
                                                                         -------------------------------------------------------------------------------
                Risk factor                        Value or range               New         Performing     Non-modified
                                                                           originations      seasoned           RPL        Modified RPL         NPL
--------------------------------------------------------------------------------------------------------------------------------------------------------
Loan Purpose..............................  Purchase....................             1.0             1.0             1.0             1.0  ..............
                                            Cashout Refinance...........             1.4             1.4             1.4             1.4  ..............
                                            Rate/Term Refinance.........             1.3             1.3             1.2             1.3  ..............
                                            Other.......................             1.0             1.0             1.0             1.0  ..............
Occupancy Type............................  Owner Occupied or Second                 1.0             1.0             1.0             1.0             1.0
                                             Home.
                                            Investment..................             1.2             1.2             1.5             1.3             1.2
Property Type.............................  1-Unit......................             1.0             1.0             1.0             1.0             1.0
                                            2-4 Unit....................             1.4             1.4             1.4             1.3             1.1
                                            Condominium.................             1.1             1.1             1.0             1.0             1.0
                                            Manufactured Home...........             1.3             1.3             1.8             1.6             1.2
Number of Borrowers.......................  Multiple borrowers..........             1.0             1.0             1.0             1.0             1.0
                                            One borrower................             1.5             1.5             1.4             1.4             1.1
Third-Party Origination Channel...........  Non-TPO.....................             1.0             1.0             1.0             1.0             1.0
                                            TPO.........................             1.1             1.1             1.1             1.1             1.0
DTI.......................................  DTI <= 25%..................             0.8             0.8             0.9             0.9  ..............
                                            25% < DTI <= 40%............             1.0             1.0             1.0             1.0  ..............
                                            DTI > 40%...................             1.2             1.2             1.2             1.1  ..............
Product Type..............................  FRM 30 year.................             1.0             1.0             1.0             1.0             1.0
                                            ARM 1/1.....................             1.7             1.7             1.1             1.0             1.1
                                            FRM 15 year.................             0.3             0.3             0.3             0.5             0.5
                                            FRM 20 year.................             0.6             0.6             0.6             0.5             0.8
Loan Size.................................  UPB <= $50,000..............             2.0             2.0             1.5             1.5             1.9
                                            $50,000 < UPB <= $100,000...             1.4             1.4             1.5             1.5             1.4
                                            UPB > $100,000..............             1.0             1.0             1.0             1.0             1.0
Subordination (OTLV x Second Lien)........  No subordination............             1.0             1.0             1.0             1.0  ..............
                                            30% < OLTV <= 60% and 0% <               1.1             1.1             0.8             1.0  ..............
                                             subordination <= 5%.
                                            30% < OLTV<= 60% and                     1.5             1.5             1.1             1.2  ..............
                                             subordination > 5%.
                                            OLTV > 60% and 0% <                      1.1             1.1             1.2             1.1  ..............
                                             subordination <= 5%.
                                            OLTV > 60% and subordination             1.4             1.4             1.5             1.3  ..............
                                             > 5%.
Loan Age..................................  Loan Age <= 24 months.......  ..............             1.0  ..............  ..............  ..............
                                            24 months < Loan Age <= 36    ..............            0.95  ..............  ..............  ..............
                                             months.
                                            36 months < Loan Age <= 60    ..............             0.8  ..............  ..............  ..............
                                             months.
                                            Loan Age > 60 months........  ..............            0.75  ..............  ..............  ..............
Cohort Burnout............................  No Burnout..................  ..............             1.0  ..............  ..............  ..............
                                            Low.........................  ..............             1.2  ..............  ..............  ..............
                                            Medium......................  ..............             1.3  ..............  ..............  ..............
                                            High........................  ..............             1.4  ..............  ..............  ..............
Interest-Only (IO)........................  No IO.......................  ..............             1.0             1.0             1.0  ..............
                                            Yes IO......................  ..............             1.6             1.4             1.1  ..............
Loan Documentation Level..................  Full Documentation..........  ..............             1.0             1.0             1.0  ..............
                                            No Documentation or Low       ..............             1.3             1.3             1.2  ..............
                                             Documentation.
Streamlined Refinance.....................  No..........................  ..............             1.0             1.0             1.0  ..............
                                            Yes.........................  ..............             1.0             1.2             1.1  ..............
Refreshed Credit Score for RPLs...........  Refreshed Credit Score < 620  ..............  ..............             1.6             1.4  ..............
                                            620 <= Refreshed Credit       ..............  ..............             1.3             1.2  ..............
                                             Score < 640.
                                            640 <= Refreshed Credit       ..............  ..............             1.2             1.1  ..............
                                             Score < 660.
                                            660 <= Refreshed Credit       ..............  ..............             1.0             1.0  ..............
                                             Score < 700.
                                            700 <= Refreshed Credit       ..............  ..............             0.7             0.8  ..............
                                             Score < 720.
                                            720 <= Refreshed Credit       ..............  ..............             0.6             0.7  ..............
                                             Score < 740.

[[Page 33347]]

 
                                            740 <= Refreshed Credit       ..............  ..............             0.5             0.6  ..............
                                             Score < 760.
                                            760 <= Refreshed Credit       ..............  ..............             0.4             0.5  ..............
                                             Score < 780.
                                            Refreshed Credit Score >=     ..............  ..............             0.3             0.4  ..............
                                             780.
Payment change from modification..........  Payment Change >= 0%........  ..............  ..............  ..............             1.1  ..............
                                            -20% <= Payment Change < 0%.  ..............  ..............  ..............             1.0  ..............
                                            -30% <= Payment Change < -    ..............  ..............  ..............             0.9  ..............
                                             20%.
                                            Payment Change < -30%.......  ..............  ..............  ..............             0.8  ..............
Previous Maximum Delinquency (in the last   0-1 Months..................  ..............  ..............             1.0             1.0  ..............
 36 months).                                2-3 Months..................  ..............  ..............             1.2             1.1  ..............
                                            4-5 Months..................  ..............  ..............             1.3             1.1  ..............
                                            6+ Months...................  ..............  ..............             1.5             1.1  ..............
Refreshed Credit Score for NPLs...........  Refreshed Credit Score < 580  ..............  ..............  ..............  ..............             1.2
                                            580 <= Refreshed Credit       ..............  ..............  ..............  ..............             1.1
                                             Score < 640.
                                            640 <= Refreshed Credit       ..............  ..............  ..............  ..............             1.0
                                             Score < 700.
                                            700 <= Refreshed Credit       ..............  ..............  ..............  ..............             0.9
                                             Score < 720.
                                            720 <= Refreshed Credit       ..............  ..............  ..............  ..............             0.8
                                             Score < 760.
                                            760 <= Refreshed Credit       ..............  ..............  ..............  ..............             0.7
                                             Score < 780.
                                            Refreshed Credit Score >=     ..............  ..............  ..............  ..............             0.5
                                             780.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Table 14 is structured in the following way: The first column 
represents secondary risk factors, the second column represents the 
values or ranges each secondary risk factor can take, and the third 
through seventh columns contain proposed risk multipliers, with each 
column containing proposed risk multipliers pertaining only to the 
single-family loan segment designated at the top of the column. There 
would be a different set of risk multipliers for each of the five 
single-family loan segments.
    In the proposed rule, each risk factor could take multiple values, 
and each value or range of values would have a risk multiplier 
associated with it. For any particular single-family whole loan or 
guarantee, each risk multiplier could take a value of 1.0, above 1.0, 
or below 1.0. A multiplier of 1.0 would imply that the risk factor 
value for a whole loan or guarantee is similar to, or in a certain 
range of, the particular risk characteristic found in the segment's 
synthetic loans. A multiplier value above 1.0 would be assigned to a 
risk factor value that represents a riskier characteristic than the one 
found in the segment's synthetic loans, while a multiplier value below 
1.0 would be assigned to a risk factor value that represents a less 
risky characteristic than the one found in the segment's synthetic 
loans. Finally, the risk multipliers would be multiplicative, so each 
single-family whole loan and guarantee in a loan segment would receive 
a risk multiplier for every risk factor pertinent to that loan segment, 
even if the risk multiplier is 1.0 (implying no change to the base 
credit risk capital requirement for that risk factor). The total 
combined risk factor for a single-family whole loan or guarantee would 
be, in general, the product of all individual risk multipliers 
pertinent to the appropriate loan segment.
    There are two general types of single-family risk factors in the 
proposed rule for which risk multipliers are applied: Risk factors 
determined at origination and risk factors that change as a loan 
seasons, or ages.
    Risk factors determined at origination include common 
characteristics such as loan purpose, occupancy type, and property 
type. The impacts of this type of risk factor on single-family mortgage 
performance and credit losses are well understood and commonly used in 
mortgage pricing and underwriting. Many of these risk factors can be 
quantified and applied in a straightforward manner using risk 
multipliers as indicated in Table 14. The full set of single-family 
risk factors determined at origination for which the proposed rule 
requires risk multipliers is:
    <bullet> Loan purpose. Loan purpose reflects the reason for the 
mortgage at origination. The proposed risk multiplier would be at least 
1.0 for any purpose other than ``purchase,'' suggesting any other 
purpose would imply a mortgage that is at least as risky.
    <bullet> Occupancy type. Occupancy type reflects the borrowers' 
intended use of the property, with an owner-occupied property 
representing a baseline level of risk (a multiplier of 1.0), and an 
investment property being more risky (a multiplier greater than 1.0).
    <bullet> Property type. Property type describes the physical 
structure of the property, with a 1-unit property representing a 
baseline level of risk (a multiplier of 1.0), and other property types 
such as 2-4 unit properties or manufactured homes being more risky (a 
multiplier greater than 1.0).
    <bullet> Number of borrowers. Number of borrowers reflects the 
number of borrowers on the mortgage note, with multiple borrowers 
representing a baseline level of risk (a multiplier of

[[Page 33348]]

1.0), and one borrower being more risky (a multiplier greater than 
1.0).
    <bullet> Third party origination channel. Third party origination 
channel reflects the source of the loan, and whether or not it 
originated from a third party, including a broker or correspondent. 
Loans that did not originate from a third party represent a baseline 
level of risk (a multiplier of 1.0).
    <bullet> Product type. Product type reflects the mortgage product 
type as of the origination date, with a 30-year fixed rate mortgage and 
select adjustable rate mortgages (including ARM 5/1 and ARM 7/1, 
captured in the ``Other'' category) representing a baseline level of 
risk (a multiplier of 1.0). Adjustable rate loans with an initial one 
year fixed rate period followed by a rate that adjusts annually (ARM 1/
1) are considered more risky (a multiplier greater than 1.0), while 
shorter-term fixed rate loans are considered less risky (a multiplier 
less than 1.0).
    <bullet> Interest-only. Interest-only reflects whether or not a 
loan has an interest-only payment feature. Interest-only loans are 
generally considered more risky (a multiplier greater than 1.0) than 
non interest-only loans due to their slower principal accumulation and 
an increased risk of default driven by the potential increase in 
principal payments at the expiration of the interest-only period. 
Interest-only loans are not permitted at origination under the 
Qualified Mortgage rule.
    <bullet> Loan documentation level. Loan documentation level refers 
to the level of income documentation used to underwrite the loan. Loans 
with low or no documentation have a high degree of uncertainty around a 
borrower's ability to pay, and are considered more risky (a multiplier 
greater than 1.0) than loans with full documentation where a lender is 
able to verify the income, assets, and employment of a borrower. Loans 
with low or no documentation are not permitted at origination under the 
Qualified Mortgage rule.
    <bullet> Streamlined refinance. Streamlined refinance reflects an 
indicator for a loan that was refinanced through one of the streamlined 
refinance programs offered by the Enterprises, including HARP. These 
loans generally cannot be refinanced under normal circumstances due to 
high MTMLTV, and therefore would be considered more risky (a multiplier 
greater than 1.0).
    Risk factors that change dynamically and are updated as a loan 
seasons include characteristics such as loan age, loan size, current 
credit score, and delinquency or modification history. While not 
important for underwriting or original loan pricing, these risk factors 
are strongly associated with probability of default and/or loss given 
default, and are therefore important in estimating capital 
requirements. The full set of dynamic single-family risk factors for 
which the proposed rule requires risk multipliers is:
    <bullet> DTI. DTI, or debt-to-income ratio, is the back-end ratio 
of the sum of the borrowers' monthly payment for principal, interest, 
taxes, homeowners' association fees and insurance, plus all fixed debts 
to the total monthly income of all borrowers as determined at the time 
of origination. DTI affects and reflects a borrower's ability to make 
payments on a loan. A DTI between 25 percent and 40 percent would 
reflect a baseline level of risk (a multiplier of 1.0), and as a 
borrower's income rises relative to the borrower's debt obligations (a 
lower DTI), the loan would be considered less risky (a multiplier less 
than 1.0). If a borrower's income shrinks relative to the borrower's 
debt obligations (a higher DTI), the loan would be considered more 
risky (a multiplier greater than 1.0).
    <bullet> Loan size. Loan size reflects the current unpaid principal 
balance of a loan. Loans with a low unpaid principal balance would be 
considered more risky than loans with a high unpaid principal balance 
due to the fact that fixed foreclosure costs represent a higher 
percentage of the unpaid principal balance for loans with a low unpaid 
principal balance. As a result, loans with a low balance would require 
higher capital in basis points than an otherwise identical loan with a 
high balance. Consequently, loans with an unpaid principal balance 
under $100,000 would receive a multiplier greater than 1.0.
    <bullet> Subordination (OLTV x second lien). Subordination refers 
to the ratio of the original loan amount of the second lien to the 
lesser of the appraised value of a loan or the sale price. Loans with 
no subordination would represent a baseline level of risk (a multiplier 
of 1.0), whereas loans with varying combinations of original loan-to-
value (OLTV) and subordination percentages would be generally 
considered more risky (a multiplier greater than 1.0).
    <bullet> Loan age. Loan age reflects the number of months since the 
loan was originated. In the proposed rule, older loans are considered 
less risky because in general as loans age the likelihood of events 
occurring that would trigger mortgage default decreases. Older loans 
have relatively low potential cumulative losses remaining, and would 
require lower credit risk capital requirements than newer loans.
    <bullet> Cohort burnout. Cohort burnout reflects the number of 
times a borrower has not taken advantage of the opportunity to 
refinance the mortgage when the borrower's mortgage rate exceeds the 
current mortgage rate by 50 basis points. When a borrower refinances a 
mortgage, the lender's credit risk decreases because the loan is 
repaid. Cohort burnout is an indicator that a borrower is less likely 
to refinance in the future given the opportunity to do so. Borrowers 
that demonstrate a lower propensity to refinance thus have higher 
credit risk, and a loan with a cohort burnout greater than zero would 
receive a multiplier greater than 1.0.
    <bullet> Refreshed credit score for re-performing loans (RPLs) and 
non-performing loans (NPLs). Refreshed credit scores refer to credit 
scores that have been updated as of the capital calculation date. In 
general, a credit score reflects the credit worthiness of a borrower, 
and a higher credit score implies lower risk and a lower multiplier. 
For RPLs, a refreshed credit score between 660 and 700 reflects a 
baseline level of risk (a multiplier of 1.0). For NPLs, a refreshed 
credit score between 640 and 700 represents a baseline level of risk (a 
multiplier of 1.0).
    <bullet> Payment change from modification. For modified loans, the 
payment change from modification reflects the change in the monthly 
payment, as a percentage of the original monthly payment, resulting 
from a permanent loan modification. In general, higher payment 
reductions tend to reduce the likelihood of future default, so loans 
with higher payment reductions from modifications would have a lower 
capital requirement (a multiplier less than 1.0).
    <bullet> Previous maximum delinquency. For RPLs, previous maximum 
delinquency reflects the maximum number of months a loan has been at 
least 30-days delinquent during the prior three years. The longer a 
loan has been delinquent, the more likely it will default in the 
future, and the more risky it is considered. Therefore, loans with a 
previous maximum delinquency between 0 and 1 month represent a baseline 
level of risk (a multiplier of 1.0), and loans with a maximum 
delinquency greater than 1 month would be considered more risky (a 
multiplier greater than 1.0).
    Not all risk multipliers would apply to every loan segment, because 
the multipliers were estimated separately for each single-family loan 
segment. In cases where a risk factor did not influence the estimated 
credit risk of whole loans and guarantees in a loan segment, or a risk 
factor did not apply

[[Page 33349]]

at all (refreshed credit scores in the new origination segment, for 
example), there would be no multiplier for that risk factor in that 
loan segment.
    In the proposed rule, single-family risk multipliers would adjust 
base credit risk capital requirements in a multiplicative manner. 
Consequently, and as a result of the simple and straightforward 
structure of the proposed multiplier framework, certain combinations of 
risk factors may result in over-capitalizing certain types of single-
family whole loans and guarantees. This could occur in part because the 
risk factors for which multipliers would be applied are not 
independent. Single-family whole loans and guarantees with a MTMLTV 
greater than 95 percent were particularly vulnerable to this 
phenomenon. Thus, the proposed rule would implement a multiplier cap of 
3.0 for the product of risk multipliers for single-family whole loans 
and guarantees with a MTMLTV greater than 95 percent. Based on FHFA 
empirical analysis, less than 3 percent of loans with a MTMLTV greater 
than 95 percent would be affected by the cap.
Net Credit Risk Capital Requirements: Loan-Level Credit Enhancements
    Loan-level credit enhancements are credit guarantees on individual 
loans. The Enterprises primarily use loan-level credit enhancements to 
satisfy the credit enhancement requirement of their charter acts. The 
Enterprises' charter acts require single-family mortgage loans with an 
unpaid principal balance exceeding 80 percent of the value of the 
property to have one of three forms of credit enhancement. The credit 
enhancement requirement can be satisfied through: The seller retaining 
a participation of at least 10 percent in the mortgage (participation 
agreement); the seller agreeing to repurchase or replace the mortgage 
in the event the mortgage is in default (repurchase or replacement 
agreements; recourse and indemnification agreements); or a guarantee or 
insurance on the unpaid principal balance which is in excess of 80 
percent LTV (guarantee or insurance). The third form, mortgage 
insurance, is the most common form of charter-required credit 
enhancement.
    The proposed rule would require the Enterprises to calculate net 
credit risk capital requirements by reducing the gross credit risk 
capital requirement on single-family loans to reflect the benefits from 
loan-level credit enhancements. Similar to the use of multipliers to 
adjust the base credit risk capital requirement for various risk 
factors, the proposed rule would use multipliers (``CE multipliers'') 
to reduce the gross credit risk capital requirement for the benefit 
from loan-level credit enhancements. CE multipliers would take values 
of less than or equal to 1.0 to reflect a reduction in the gross credit 
risk capital requirement. For example, a CE multiplier of 0.65 on a 
single-family loan would imply that an Enterprise is responsible for 65 
percent of the credit risk of the loan and that the counterparty 
providing the credit enhancement is responsible for the remaining 35 
percent of the credit risk. A higher CE multiplier would imply an 
Enterprise is taking a greater share of the losses and a lower CE 
multiplier would imply the counterparty is taking a greater share of 
the losses.
Participation Agreements
    Participation agreements are rarely utilized by the Enterprises and 
for reasons of simplicity, the proposed rule would not assign any 
benefit for these agreements (a CE multiplier of 1.0).
Repurchase, Replacement, Recourse, and Indemnification Agreements
    Repurchase, replacement, recourse, and indemnification agreements 
may be unlimited or limited. Unlimited agreements provide full coverage 
for the life of the loan, while limited agreements provide partial 
coverage or have a limited duration. In the proposed rule, a 
counterparty would be responsible for all credit risk in the presence 
of an unlimited agreement, and the loan would be assigned a CE 
multiplier of zero. For limited agreements, the proposed rule would 
require the Enterprises to use the single-family CRT techniques 
described section II.C.4.b to determine the appropriate benefit from 
the limited agreement.
Mortgage Insurance
    Mortgage insurance (MI) is an insurance policy where an insurance 
company covers a portion of the loss if a borrower defaults on a 
single-family mortgage loan. In the proposed rule, the benefit from MI 
would vary based on a number of MI coverage and loan characteristics, 
including (i) whether MI is cancellable or non-cancellable, (ii) 
whether MI is charter-coverage or guide-coverage, and (iii) loan 
characteristics, including original LTV, loan age, amortization term, 
and loan performance segment.
    <bullet> Non-cancellable versus cancellable MI. Non-cancellable MI 
provides coverage for the life of the loan. Non-cancellable MI is 
typically associated with single premium insurance policies. 
Cancellable MI allows for the cancellation of coverage upon a 
borrower's request, when the loan balance falls to 80 percent of the 
original property value, or automatic cancellation when the loan 
balance falls below 78 percent of the original property value or the 
loan reaches the midpoint of the loan's amortization schedule, if the 
mortgage is current. Due to the longer period of coverage, non-
cancellable MI provides more credit risk protection than cancellable 
MI. In the proposed rule, non-cancellable MI CE multipliers would be 
lower than cancellable MI CE multipliers. The proposed rule would 
provide separate sets of multipliers for non-cancellable and 
cancellable MI to reflect this difference in risk protection.
    <bullet> Charter-level versus guide-level MI coverage. Charter-
level coverage provides the minimum level of coverage required by the 
Enterprises' charter acts for loans with LTVs greater than 80 percent. 
Guide-level coverage provides deeper coverage, roughly double the 
coverage provided by charter-level coverage. Guide-level coverage 
implies greater credit risk protection from the MIs. Therefore, in the 
proposed rule, the CE multipliers for guide-level coverage would be 
lower than the CE multipliers for charter-level coverage to reflect the 
Enterprises having a lower share of the credit risk.
    <bullet> Original LTV. Loans with higher original LTV require 
higher MI coverage levels than loans with lower original LTV. Higher MI 
coverage levels imply greater credit risk protection from the MIs. 
Therefore, in the proposed rule, loans with higher original LTVs would 
have lower CE multipliers.
    <bullet> Amortization term. For cancellable MI, loans with a 15- to 
20-year amortization period will have MI cancellation triggered earlier 
than loans with a 30-year amortization period. Therefore, loans with 
longer amortization terms have a longer period of credit risk 
protection from MIs and the Enterprises have a lower share of the risk. 
In the proposed rule, loans with a 30-year amortization period would 
have a lower CE multiplier than loans with a 15- to 20-year 
amortization period for loans with cancellable MI.
    <bullet> Loan segment. MI coverage on delinquent loans cannot be 
cancelled. Cancellation of MI coverage on modified performing loans is 
based on the modified LTV and the modified amortization term, which are 
typically higher than the original LTV and the original amortization 
term. In both of these cases, the MI coverage is extended for a longer 
period, resulting in greater credit risk protection, relative to 
performing loans. Therefore, in the proposed rule, delinquent and 
modified

[[Page 33350]]

loans would have a lower CE multiplier than performing loans.
    <bullet> Loan age. MI cancellation will be triggered sooner for 
older loans than for younger loans because the older loans will reach 
an amortized LTV of 78 percent or the mid-point of the loan's 
amortization period first. Therefore, older loans with cancellable MI 
have a shorter period of remaining MI coverage and thus have less 
credit risk protection from MI. In the proposed rule, older loans with 
cancellable MI would have a higher CE multiplier than would younger 
loans.
    The proposed rule would use the following set of tables to present 
the CE multipliers for loans with MI. These tables take into 
consideration the MI factors that were discussed above.
    The first table contains proposed CE multipliers for non-
cancellable MI coverage. This table would be used for all loan 
segments, except the NPL loan segment. The table differentiates 
multipliers by type of coverage (charter and guide), original LTV, 
amortization term, and coverage percent.

   Table 15--CE Multipliers for New Originations, Performing Seasoned
               Loans, and RPLs When MI Is Non-Cancellable
------------------------------------------------------------------------
     Product/coverage type          Coverage category      CE multiplier
------------------------------------------------------------------------
15/20 Year Amortizing Loan with  80% < OLTV <= 85% and             0.846
 Guide-level Coverage.            MI Coverage Percent =            0.701
                                  6%.
                                 85% < OLTV <= 90% and
                                  MI Coverage Percent =
                                  12%.
                                 90% < OLTV <= 95% and             0.408
                                  MI Coverage Percent =
                                  25%.
                                 95% < OLTV <= 97% and             0.226
                                  MI Coverage Percent =
                                  35%.
                                 OLTV > 97% and MI                 0.184
                                  Coverage Percent = 35%.
30 Year Amortizing Loan with     80% < OLTV <= 85% and             0.706
 Guide-level Coverage.            MI Coverage Percent =            0.407
                                  12%.
                                 85% < OLTV <= 90% and
                                  MI Coverage Percent =
                                  25%.
                                 90% < OLTV <= 95% and             0.312
                                  MI Coverage Percent =
                                  30%.
                                 95% < OLTV <= 97% and             0.230
                                  MI Coverage Percent =
                                  35%.
                                 OLTV > 97% and MI                 0.188
                                  Coverage Percent = 35%.
15/20 Year Amortizing Loan with  80% < OLTV <= 85% and             0.846
 Charter-level Coverage.          MI Coverage Percent =            0.701
                                  6%.
                                 85% < OLTV <= 90% and
                                  MI Coverage Percent =
                                  12%.
                                 90% < OLTV <= 95% and             0.612
                                  MI Coverage Percent =
                                  16%.
                                 95% < OLTV <= 97% and             0.570
                                  MI Coverage Percent =
                                  18%.
                                 OLTV > 97% and MI                 0.535
                                  Coverage Percent = 20%.
30 Year Amortizing Loan with     80% < OLTV <= 85% and             0.850
 Charter-level Coverage.          MI Coverage Percent =            0.713
                                  6%.
                                 85% < OLTV <= 90% and
                                  MI Coverage Percent =
                                  12%.
                                 90% < OLTV <= 95% and             0.627
                                  MI Coverage Percent =
                                  16%.
                                 95% < OLTV <= 97% and             0.590
                                  MI Coverage Percent =
                                  18%.
                                 OLTV > 97% and MI                 0.558
                                  Coverage Percent = 20%.
------------------------------------------------------------------------

    The proposed rule would have three tables for cancellable MI. The 
first cancellable MI table contains proposed CE multipliers for the new 
originations loan segment, the performing seasoned loans segment, and 
the non-modified RPL loan segment. The table differentiates multipliers 
by type of coverage (charter-level and guide-level), original LTV, 
coverage percent, amortization term, and loan age.
BILLING CODE 8070-01-P

[[Page 33351]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.004

    The second cancellable MI table contains proposed CE multipliers 
for the modified RPL loan segment for loans with 30-year post-
modification amortization. The table differentiates multipliers by type 
of coverage (charter and guide), original LTV, coverage percent, 
amortization term, and loan age.

[[Page 33352]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.005

    The third cancellable MI table contains proposed CE multipliers for 
the modified RPL loan segment for loans with 40-year post-modification 
amortization. The table differentiates multipliers by type of coverage 
(charter-level and guide-level), original LTV, coverage percent, and 
loan age.

[[Page 33353]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.006

BILLING CODE 8070-01-C
    The final MI table contains proposed CE multipliers for the NPL 
loan segment. MI on delinquent loans cannot be cancelled; therefore, 
there is no differentiation between cancellable and non-cancellable MI 
for the NPL loan segment. The table differentiates multipliers by type 
of coverage (charter-level and guide-level), original LTV, amortization 
term, and coverage percent.

                    Table 19--CE Multipliers for NPLs
------------------------------------------------------------------------
                                                           CE multiplier
------------------------------------------------------------------------
15/20 Year Amortizing Loan with  80% < OLTV <= 85% and             0.893
 Guide-level Coverage.            MI Coverage Percent =            0.803
                                  6%.
                                 85% < OLTV <= 90% and
                                  MI Coverage Percent =
                                  12%.

[[Page 33354]]

 
                                 90% < OLTV <= 95% and             0.597
                                  MI Coverage Percent =
                                  25%.
                                 95% < OLTV <= 97% and             0.478
                                  MI Coverage Percent =
                                  35%.
                                 OLTV > 97% and MI                 0.461
                                  Coverage Percent = 35%.
30 Year Amortizing Loan with     80% < OLTV <= 85% and             0.813
 Guide-level Coverage.            MI Coverage Percent =            0.618
                                  12%.
                                 85% < OLTV <= 90% and
                                  MI Coverage Percent =
                                  25%.
                                 90% < OLTV <= 95% and             0.530
                                  MI Coverage Percent =
                                  30%.
                                 95% < OLTV <= 97% and             0.490
                                  MI Coverage Percent =
                                  35%.
                                 OLTV > 97% and MI                 0.505
                                  Coverage Percent = 35%.
15/20 Year Amortizing Loan with  80% < OLTV <= 85% and             0.893
 Charter-level Coverage.          MI Coverage Percent =            0.803
                                  6%.
                                 85% < OLTV <= 90% and
                                  MI Coverage Percent =
                                  12%.
                                 90% < OLTV <= 95% and             0.775
                                  MI Coverage Percent =
                                  16%.
                                 95% < OLTV <= 97% and             0.678
                                  MI Coverage Percent =
                                  18%.
                                 OLTV > 97% and MI                 0.663
                                  Coverage Percent = 20%.
30 Year Amortizing Loan with     80% < OLTV <= 85% and             0.902
 Charter-level Coverage.          MI Coverage Percent =            0.835
                                  6%.
                                 85% < OLTV <= 90% and
                                  MI Coverage Percent =
                                  12%.
                                 90% < OLTV <= 95% and             0.787
                                  MI Coverage Percent =
                                  16%.
                                 95% < OLTV <= 97% and             0.765
                                  MI Coverage Percent =
                                  18%.
                                 OLTV > 97% and MI                 0.760
                                  Coverage Percent = 20%.
------------------------------------------------------------------------

    The proposed CE multipliers reflect the average of the Enterprises' 
estimates. The Enterprises, however, would not necessarily apply the CE 
multipliers in isolation, but would first adjust the multipliers to 
account for the probability that a counterparty may not fully meet its 
payment obligations. The following section describes the proposed 
approach for adjusting CE multipliers for counterparty risk.
Counterparty Credit Risk
    Sharing loss with counterparties exposes the Enterprises to 
counterparty credit risk. To account for this exposure, the proposed 
rule would reduce the recognized benefits from credit enhancements to 
incorporate the risk that counterparties are unable to meet claim 
obligations. For this reason, the proposed rule would establish a 
counterparty haircut multiplier (CP multiplier) to the CE benefit. The 
CP haircut multiplier would take values from zero to one. A value of 
zero, the smallest haircut, would imply a counterparty will fully meet 
its claim obligations, while a value of one, the largest haircut, would 
imply a counterparty will not meet its claim obligations. A value 
between zero and one would imply a counterparty will meet a portion of 
its claim obligations.
    The CP haircut multiplier would depend on a number of factors that 
reflect counterparty credit risk. The two main factors are the 
creditworthiness of the counterparty and the counterparty's level of 
concentration in mortgage credit risk. The proposed rule would require 
the Enterprises to assign a counterparty rating using the rating scheme 
provided in Table 20. In assigning a rating, the Enterprises would 
assign the counterparty rating that most closely aligns to the 
assessment of the counterparty from its internal counterparty risk 
framework. Similarly, the proposed rule would require the Enterprises 
to utilize their counterparty risk management frameworks to assign each 
counterparty a rating of ``not high'' or ``high'' to reflect the 
counterparty's concentration in mortgage credit risk.

            Table 20--Counterparty Financial Strength Ratings
------------------------------------------------------------------------
   Counterparty rating                      Description
------------------------------------------------------------------------
1........................  The counterparty is exceptionally strong
                            financially. The counterparty is expected to
                            meet its obligations under foreseeable
                            adverse events.
2........................  The counterparty is very strong financially.
                            There is negligible risk the counterparty
                            may not be able to meet all of its
                            obligations under foreseeable adverse
                            events.
3........................  The counterparty is strong financially. There
                            is a slight risk the counterparty may not be
                            able to meet all of its obligations under
                            foreseeable adverse events.
4........................  The counterparty is financially adequate.
                            Foreseeable adverse events will have a
                            greater impact on '4' rated counterparties
                            than higher rated counterparties.
5........................  The counterparty is financially questionable.
                            The counterparty may not meet its
                            obligations under foreseeable adverse
                            events.
6........................  The counterparty is financially weak. The
                            counterparty is not expected to meet its
                            obligations under foreseeable adverse
                            events.
7........................  The counterparty is financially extremely
                            weak. The counterparty's ability to meet its
                            obligations is questionable.
8........................  The counterparty is in default on an
                            obligation or is under regulatory
                            supervision.
------------------------------------------------------------------------

    During the most recent financial crisis, three out of seven 
mortgage insurance companies were placed in run-off by their state 
regulators, and payments on the Enterprises' claims were deferred by 
the state regulators. This posed a serious counterparty risk and 
financial losses for the Enterprises. More generally, the crisis 
highlighted that counterparty risk can be amplified when the 
counterparty's credit exposure is highly correlated with the 
Enterprises' credit exposure. This amplification of counterparty risk 
due to the correlation between counterparties' credit exposures is 
referred to as wrong-way risk. Counterparties whose main lines of 
business are highly concentrated in mortgage credit risk have a higher 
probability to default on payment obligations when the mortgage

[[Page 33355]]

default rate is high. Therefore, counterparties with higher levels of 
mortgage credit risk concentration have higher counterparty risk 
relative to diversified counterparties. The proposed rule would assign 
larger haircuts to counterparties with higher levels of mortgage credit 
risk concentration relative to diversified counterparties. The 
Enterprises would assess the level of mortgage risk concentration for 
each individual counterparty to determine whether the insurer is well 
diversified or whether it has a high concentration risk.
    To calculate the CP haircut, the proposed rule would use a modified 
version of the Basel Advanced Internal Ratings Based (IRB) approach. 
The modified version leverages the IRB approach to account for the 
creditworthiness of the counterparty but makes changes to reflect the 
level of mortgage credit risk concentration. The Basel IRB framework 
provides the ability to differentiate haircuts between counterparties 
with different levels of risk. The proposed rule would augment the IRB 
approach to capture risk across counterparties. In this way, the 
proposed adjustment would help capture wrong-way risk between the 
Enterprises and their counterparties.
    In particular, the proposed approach calculates the counterparty 
haircut by multiplying stress loss given default by the probability of 
default and a maturity adjustment for the asset:

CP Haircut = LGD<INF>stress</INF> * PD<INF>stress</INF> * MA

where LGD<INF>stress</INF> denotes stress loss given default, 
PD<INF>stress</INF> is stress default probability, and MA is 
maturity adjustment. MA is calculated as follows:
[GRAPHIC] [TIFF OMITTED] TP17JY18.007

PD<INF>stress</INF> is a function of expected probability of default 
PD, asset value correlation [rho], and an asset value correlation 
multiplier (AVCM). PD<INF>stress</INF> is calculated as follows:
[GRAPHIC] [TIFF OMITTED] TP17JY18.008

where SCI is supervisory confidence interval, N(.) is the standard 
normal distribution, and G(.) is the inverse standard normal 
distribution.

    The following table highlights the parameterization of the proposed 
approach.

  Table 21--Parameterization of the Single-Family Counterparty Haircut
                               Multipliers
------------------------------------------------------------------------
                 Parameters                         Proposed values
------------------------------------------------------------------------
LGDStress...................................  45%.
SCI.........................................  99.9%.
Correlation function ([rho])................  Basel (PD).
AVCM for High level of Mortgage               175%.
 Concentration Risk.
AVCM for Not High level of Mortgage           125%.
 Concentration Risk.
Maturity 30yr (M)...........................  5.
Maturity 15/20yr (M)........................  3.5.
NPL Maturity (M)............................  1.5.
------------------------------------------------------------------------

    From the parameters table, stress loss given default (LGD) is 
calibrated to 45 percent according to the historic average stress 
severity rates. The maturity adjustment is calibrated to 5 years for 
30-year products and to 3.5 years for 15- to 20-year products to 
approximately reflect the average life of the assets. The expected 
probability of default (PD) is calculated using a historical 1-year PD 
matrix for all financial institutions.
    As mentioned earlier, counterparties with a lower concentration of 
mortgage credit risk and therefore a lower potential for wrong-way risk 
would be afforded a lower haircut relative to the counterparties with 
higher concentrations of mortgage credit risk. This difference is 
captured through the asset valuation correlation multiplier, AVCM. An 
AVCM of 1.75 is assigned to counterparties with high exposure to 
mortgage credit risk and 1.25 is assigned to diversified 
counterparties. The parameters of the Basel IRB formula, including the 
AVCM, were augmented to best fit the internal counterparty credit risk 
haircuts developed by the Enterprises. This method of accounting for 
wrong-way risk is transparent and parsimonious.
    The NPL loan segment represents a different level of counterparty 
risk relative to the performing loans segment. Unlike performing loans, 
the Enterprises expect to submit claims for non-preforming loans in the 
near future. The proposed rule would reduce Basel's effective maturity 
from 5 (or 3.5 for 15/20Yr) to 1.5 for all loans in the NPL loan 
segment. The reduced effective maturity would lower counterparty 
haircuts on loans in the NPL loan segment.
    The proposed rule would use the following look-up table to 
determine the counterparty risk haircut multiplier.

[[Page 33356]]



         Table 22--Single-Family Counterparty Risk Haircut (CP Haircut) Multipliers by Rating, Mortgage Concentration Risk, Segment, and Product
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    CP haircut
                                                         -----------------------------------------------------------------------------------------------
                                                               Mortgage concentration risk: Not high             Mortgage concentration risk: High
                                                         -----------------------------------------------------------------------------------------------
                                                           New originations, performing                    New originations, performing
                 Counterparty rating (%)                    seasoned, and re-performing                     seasoned, and re-performing
                                                                       loans                   Non-                    loans                   Non-
                                                         --------------------------------   performing   --------------------------------   performing
                                                           30 Yr product     20/15 Yr        loans (%)     30 Yr product     20/15 Yr        loans (%)
                                                                (%)         product (%)                         (%)         product (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................................             1.8             1.3             0.6             2.8             2.0             0.9
2.......................................................             4.5             3.5             2.0             7.3             5.6             3.2
3.......................................................             5.2             4.0             2.4             8.3             6.4             3.9
4.......................................................            11.4             9.5             6.9            17.2            14.3            10.4
5.......................................................            14.8            12.7             9.9            20.9            18.0            14.0
6.......................................................            21.2            19.1            16.4            26.8            24.2            20.8
7.......................................................            40.0            38.2            35.7            43.7            41.7            39.0
8.......................................................            47.6            46.6            45.3            47.6            46.6            45.3
--------------------------------------------------------------------------------------------------------------------------------------------------------

Net Credit Risk Capital Requirement for Single-Family Whole Loans and 
Guarantees
    The proposed rule would use the following formula to calculate the 
net credit risk capital requirement for single-family whole loans and 
guarantees with loan-level credit enhancement, taking into account the 
credit enhancement benefit adjusted for the counterparty haircut:

Net Credit Risk Capital = Gross Credit Risk Capital * (1-(1-CE 
Multiplier) * (1-CP Haircut Multiplier)).

    For single-family whole loans and guarantees without loan-level 
credit enhancements, the net credit risk capital requirement would 
equal the gross credit risk capital requirement.
    Question 6: FHFA is soliciting comments on the proposed framework 
for calculating credit risk capital requirements for single-family 
whole loans and guarantees, including the loan segments, base grids, 
and risk multipliers. What modifications should FHFA consider and why?
    Question 7: FHFA is soliciting comments on the proposed use of 
separate single-family credit risk capital grids for new originations 
and performing seasoned loans. The proposed new originations grid has a 
unique requirement for loans with an OLTV of 80 percent due to the 
volume of such loans, but this could lead to increases in capital 
requirements for loans originated with an OLTV between 75 percent and 
80 percent when those loans season. Should FHFA consider combining the 
single-family new originations and performing seasoned loan grids? What 
other modifications should FHFA consider and why?
Enterprise- and Ginnie Mae-Guaranteed Single-Family Mortgage-Backed 
Securities
    There is no credit risk capital requirement in the proposed rule 
for single-family mortgage-backed securities (MBS) held in portfolio 
that were issued and guaranteed by an Enterprise or Ginnie Mae, and 
collateralized mortgage obligations (CMOs) held in portfolio that are 
collateralized by Enterprise or Ginnie Mae whole loans or securities. 
Ginnie Mae securities are backed by the U.S. government and therefore 
do not have credit risk. For MBS and CMOs issued by an Enterprise and 
later purchased by the same Enterprise for its portfolio, the credit 
risk is already reflected in the credit risk capital requirement on the 
underlying single-family whole loans and guarantees (section II.C.4.a). 
For MBS and CMOs held by an Enterprise that were issued by the other 
Enterprise, there is counterparty risk. However, these holdings are 
typically small and, for reasons of simplicity, the proposed rule does 
not include a capital requirement for this exposure.
    Question 8: Should single-family MBS and CMOs held by an Enterprise 
that were issued by the other Enterprise be subject to a counterparty 
haircut to reflect counterparty risk?
b. Credit Risk Transfer
    This section corresponds to Proposed Rule Sec. Sec.  1240.14 
through 1240.16.
Overview
    The Enterprises systematically reduce the credit risk on their 
single-family books of business by transferring and sharing risk beyond 
loan-level credit enhancements through single-family credit risk 
transfers (CRTs). These CRTs include capital markets and insurance/
reinsurance transactions, among others. In the proposed rule, single-
family capital relief for the Enterprises would be equal to the 
reduction in credit risk capital from transferring all or part of a 
credit risk exposure that remains after considering loan-level credit 
enhancements. For a given single-family CRT, the proposed rule would 
restrict capital relief to be no greater than total net credit risk 
capital requirements on all single-family whole loans and guarantees 
underlying the CRT (or belonging to the reference pool underlying the 
CRT). Therefore, the single-family operational risk capital requirement 
and the single-family going-concern buffer would not contribute to 
capital relief.
    The proposed rule would require the Enterprises to calculate 
capital relief on every CRT. If a CRT has multiple pool groups, the 
requirement would apply separately to each pool group. The proposed 
rule would then require each Enterprise to calculate total capital 
relief as the sum of capital relief across all its CRTs, including 
across all pool groups.
    This section provides (i) a background on single-family CRTs, (ii) 
types of single-family CRTs offered by the Enterprises, (iii) the 
proposed rule's approach for CRT capital relief, (iv) alternative 
approaches considered, and (v) estimated effects of the proposed rule's 
approach.
Background
    CRT transactions provide credit protection beyond that provided by 
loan-level credit enhancements. CRTs can be viewed as the Enterprise 
paying a portion of the guarantee fee as a cost of transferring credit 
risk to private sector investors. To date, single-family

[[Page 33357]]

CRTs have been focused on transferring expected and unexpected credit 
risk. This amounts to the Enterprises obtaining the equivalent of 
insurance to cover their potential credit losses. The proposed rule 
proposes an approach to measuring capital relief on CRT transactions 
from the transfer of unexpected losses while also accounting for 
potential counterparty credit risks where appropriate.
Types of Single-Family CRTs
    The Enterprises have developed a variety of single-family CRTs. The 
types of transactions include structured debt issuances known as 
Structured Agency Credit Risk (STACR) for Freddie Mac and Connecticut 
Avenue Securities (CAS) for Fannie Mae, insurance/reinsurance 
transactions, front-end lender risk sharing transactions, and senior-
subordinate securities.
Enterprise Debt Issuance
    The STACR and CAS securities account for the majority of single-
family CRTs to date. These securities are issued as Enterprise debt and 
do not constitute the sale of mortgage loans or their cash flows. 
Instead, STACR and CAS are considered to be synthetic notes or 
derivatives because their cash flows track to the credit risk 
performance of a notional reference pool of mortgage loans. For the 
STACR and CAS transactions, the Enterprises receive the proceeds of the 
note issuance at the time of sale to investors. The Enterprises pay 
interest to investors on a monthly basis and allocate principal to 
investors based on the repayment and credit performance of the loans in 
the underlying reference pool. Investors ultimately receive a return of 
their principal, less any covered credit losses. The debt transactions 
are fully collateralized since investors pay for the notes in full. 
Thus, the Enterprises do not bear any counterparty credit risk on debt 
transactions.
Insurance or Reinsurance
    Insurance or reinsurance transactions that are over and above loan-
level mortgage insurance are considered CRTs. To date, the insurance 
and reinsurance CRTs have focused primarily on pool-level insurance 
transactions. In contrast to loan-level insurance structures such as 
MI, pool-level insurance covers an entire pool of hundreds or thousands 
of loans. Pool insurance transactions are typically structured with an 
aggregated loss amount. The Enterprises, as policy holders, typically 
retain some portion (or all) of the first loss. The cost of pool-level 
insurance is generally paid by the Enterprise, not the lender or 
borrower. In general, because the insurance transactions are partly 
collateralized the Enterprises may bear some counterparty credit risk.
    Reinsurance companies have been the primary provider of pool-level 
insurance for the Enterprises' CRTs.\39\ Fannie Mae's reinsurance risk 
transfer transactions are known as Credit Insurance Risk Transfer 
(CIRT), and Freddie Mac's reinsurance transactions are known as Agency 
Credit Insurance Structure (ACIS). One advantage of conducting 
transactions with reinsurers is that they are generally diversified in 
their risk exposures. This may result in lower counterparty risk 
because their books of business risk should be less correlated with the 
Enterprise's book of business risk and thus may be better able to 
withstand a home price stress cycle than a monoline mortgage insurer. 
The Enterprises further reduce counterparty risk in pool-level 
transactions through collateral requirements.
---------------------------------------------------------------------------

    \39\ Many reinsurance companies do not wish to be or are not 
licensed to write polices directly to non-insurance companies, such 
as the Enterprises. Thus, although it is the reinsurance company 
that ultimately provides all of the risk capital, if the reinsurer 
is not writing the policy directly to the Enterprise, an insurance 
company must stand in the middle of the transaction. In many cases, 
this insurance company is a ``protected cell,'' that is, a vehicle 
established to write insurance policies solely for the insured and 
to transfer that risk to reinsurers. The cell is used exclusively 
for Enterprise CRT purposes. The protected cell acts purely as a 
pass-through entity and takes no credit risk itself.
---------------------------------------------------------------------------

Front-End Lender Risk Sharing Transactions
    Front-end (or upfront) lender risk sharing transactions include 
various methods of CRT where an originating lender or aggregator 
retains a portion of the credit risk associated with the loans that 
they sell to or service for the Enterprises. In this case, the credit 
risk sharing arrangement is entered into prior to the lender delivering 
the loans to the Enterprise. In exchange, the lender is compensated for 
the risk. In these transactions, the Enterprises bear some counterparty 
credit risk. However, the Enterprise typically requires some form of 
collateral or other arrangement to offset the counterparty risk 
inherent in the front-end transaction. Front-end lender risk sharing 
transactions are generally described as lender recourse or 
indemnification arrangements, or collateralized recourse. One benefit 
of the lender recourse or indemnification structure in which the credit 
risk is retained by the lender is that it aligns the interest of the 
lender and servicer with the credit risk purchaser and the Enterprise.
Senior-Subordinate Securitization
    In a senior-subordinate (senior-sub) securitization, the Enterprise 
sells a pool of mortgages to a trust that securitizes cash flows from 
the pool into several tranches of bonds, similar to private label 
security transactions. A tranche refers to all securitization exposures 
associated with a securitization that have the same seniority. The 
subordinated bonds, also called mezzanine and first-loss bonds, provide 
the credit protection for the senior bond. Unlike STACR and CAS, the 
bonds created in a senior-sub transaction are mortgage-backed 
securities, not synthetic securities. In addition, unlike typical MBS 
issued by the Enterprises, only the senior tranche is credit-guaranteed 
by the Enterprise.
Proposed Approach for Single-Family CRT Capital Relief
    The proposed rule would require that the Enterprises calculate 
capital relief using a step-by-step approach. To identify capital 
relief, the proposed rule would combine credit risk capital and 
expected losses on the underlying single-family whole loans and 
guarantees, tranche structure, ownership, timing of coverage, and 
counterparty credit risk. In general, the proposed rule would require 
five steps when calculating capital relief.
    In the first step, the Enterprises would distribute credit risk 
capital on the underlying single-family whole loans and guarantees to 
the tranches of the CRT independent of tranche ownership, while 
controlling for expected losses, such that the riskiest, most junior 
tranches would be allocated capital before the most senior tranches. 
Under the proposed approach, an Enterprise would hold the same level of 
capital if the Enterprise held every tranche of its risk transfer 
vehicle or held the underlying assets in portfolio. The total credit 
risk capital across all tranches of the CRT would equal credit risk 
capital on the underlying single-family whole loans and guarantees.
    In the second step, the Enterprises would calculate capital relief 
accounting for tranche ownership. The proposed approach would provide 
the Enterprises capital relief from transferring all or part of a 
credit risk exposure. For each tranche or exposure, the Enterprises 
would identify the portion of the tranche owned by private investors or 
covered by a loss sharing agreement. Then, in general, the Enterprises 
would calculate the capital relief as the product of the credit risk

[[Page 33358]]

capital allocated to the exposure and the portion of the tranche owned 
by private investors or covered by a loss sharing agreement.
    However, this initial calculation of capital relief must be 
adjusted to account for loss timing and counterparty credit risk. In 
particular, CRT coverage can expire before the underlying loans mature. 
Also, loss sharing agreements may be subject to counterparty credit 
risk. Capital relief afforded by credit risk transfers would be 
overstated absent such an adjustment.
    Therefore in the third step, for each tranche, capital relief would 
be lowered by a loss timing factor that accounts for the timing of 
coverage. The loss timing factor would address the mismatch between 
lifetime single-family losses on the whole loans and guarantees 
underlying the CRT and the term of coverage on the CRT.
    In the fourth step, for loss sharing agreements, the Enterprises 
would apply haircuts to previously calculated capital relief to adjust 
for counterparty credit risk. In particular, the Enterprises would 
consider the credit worthiness of each counterparty when assessing the 
contribution of loss sharing arrangements such that the capital relief 
is lower for less credit worthy counterparties. At the same time, in 
the proposed approach, collateral posted by a counterparty would be 
considered when determining the counterparty credit risk, as posted 
collateral would at least partially offset the effect of the 
counterparty exposure.
    Lastly, the Enterprises would calculate total capital relief by 
adding up capital relief for each tranche in the CRT. Further, in the 
event that the CRT has multiple pool groups, then the proposed rule 
would calculate each group's capital relief separately.
    Overall, the proposed approach would afford relatively higher 
levels of capital relief to the riskier, more junior tranches of a CRT 
that are the first to absorb unexpected losses, and relatively low 
levels of capital relief to the most senior tranches. The proposed 
approach would also afford greater capital relief for transactions that 
provide coverage (i) on a higher percentage of unexpected losses, (ii) 
for a longer period of time, and (iii) with lower levels of 
counterparty credit risk.
    For comparison, the proposed approach is analogous to the 
Simplified Supervisory Formula Approach (``SSFA'') under the banking 
regulators' capital rules applicable to banks, savings associations, 
and their holding companies.\40\ However, the proposed approach 
deviates from SSFA in that it: (i) Provides for a more refined view of 
risk differentiation across transactions by accounting for differences 
in maturities between the CRT and its underlying whole loans and 
guarantees, and (ii) does not discourage CRT transactions by elevating 
aggregate post-transaction risk-based capital requirements above risk-
based capital requirements on the underlying whole loans and 
guarantees. In particular, the SSFA requires more capital on a 
transaction-wide basis than would be required if the underlying assets 
had not been part of a risk transfer to account for the complexity 
introduced by the securitization structure. Under SSFA, if an 
Enterprise held every tranche of a CRT, its overall capital requirement 
would be greater than if the Enterprise held the underlying assets in 
portfolio. In order to avoid creating incentives that would discourage 
the Enterprises from selling tranches as part of their credit risk 
transfer programs, under the proposed rule, an Enterprise would be 
required to hold the same level of capital whether the Enterprise held 
every tranche of its CRT or whether the Enterprise held the underlying 
assets in portfolio.
---------------------------------------------------------------------------

    \40\ See 12 CFR 3.211 (OCC); 12 CFR 217.43 (Federal Reserve 
Board); 12 CFR 324.43 (FDIC).
---------------------------------------------------------------------------

Single-Family CRT Example
    The proposed rule would require each Enterprise to calculate 
capital relief using a five-step approach. The following example 
provides an illustration of the five steps. Consider the following 
inputs from an illustrative CRT (see Figure 1):
    <bullet> $1,000 million in UPB of performing 30-year fixed rate 
single-family whole loans and guarantees with original LTVs greater 
than 60 percent and less than or equal to 80 percent;
    <bullet> CRT coverage term of 10 years;
    <bullet> Three tranches--B, M1, and A--where tranche B attaches at 
0 bps and detaches at 50 bps, tranche M1 attaches at 50 bps and 
detaches at 450 bps, and tranche A attaches at 450 bps and detaches at 
10,000 bps;
    <bullet> Tranches B and A are retained by the Enterprise, and 
ownership of tranche M1 is split between capital markets (60 percent), 
a reinsurer (35 percent), and the Enterprise (5 percent);
    <bullet> An aggregate net credit risk capital requirement on the 
single-family whole loans and guarantees underlying the CRT of 275 bps;
    <bullet> Aggregate expected losses on the single-family whole loans 
and guarantees underlying the CRT of 25 bps; and
    <bullet> The reinsurer posts $2.8 million in collateral, has a 
counterparty financial strength rating of 3, and does not have a high 
level of mortgage concentration risk.

[[Page 33359]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.009

    In the first step, the Enterprises would distribute the aggregate 
net credit risk capital to the tranches of the CRT independent of 
tranche ownership, while controlling for aggregate expected losses. For 
the illustrative CRT, the Enterprise would allocate aggregate net 
credit risk capital and expected losses to the riskiest, most junior 
tranche (tranche B) before the mezzanine tranche (tranche M1) and the 
most senior tranche (tranche A).
    For the illustrative CRT, the Enterprise would allocate aggregate 
net credit risk capital and expected losses such that the riskiest, 
most junior tranche (tranche B) would receive its allocation before the 
mezzanine tranche (tranche M1) and the most senior tranche (tranche A). 
In particular, the Enterprise would first distribute aggregate expected 
losses (25 bps) and 25 bps of aggregate net credit risk capital to 
tranche B. The Enterprise would then distribute the remaining aggregate 
credit risk capital (250 bps) to tranche M1. As tranche A's attachment 
point exceeds the sum of aggregate expected losses and aggregate net 
credit risk capital, the Enterprise would not allocate net credit risk 
capital to tranche A.
    In the second step, the Enterprises would calculate capital relief 
accounting for tranche ownership. This approach would provide the 
Enterprise capital relief from transferring all or part of a credit 
risk exposure. For the illustrative CRT, the Enterprise would only 
receive capital relief from 95 percent of tranche M1 since the 
Enterprise retains all of tranches A and B and retains only 5 percent 
of tranche M1. The Enterprise would calculate the capital relief on 
tranche M1 as the product of the allocated aggregate net credit risk 
capital (250 bps) and sum of the portion of the tranche owned by 
private investors (60 percent) and covered by a reinsurer (35 percent). 
Thus, the Enterprise would calculate initial capital relief of 237.5 
bps or the product of 250 bps and 95 percent.
    However, this initial calculation of capital relief must be 
adjusted to account for loss timing and counterparty credit risk. 
Therefore, in the third step the proposed rule lowers initial capital 
relief by a loss timing factor that accounts for the timing of 
coverage. The loss timing factor addresses the mismatch between 
lifetime losses on the 30-year fixed-rate single-family whole loans and 
guarantees underlying the illustrative CRT and the CRT's coverage of 10 
years. The loss timing factor for the illustrative CRT with 10 years of 
coverage and backed by 30-year fixed-rate single-family whole loans and 
guarantees with original LTVs greater than 60 percent and less than or 
equal to 80 percent is 88 percent. Therefore, the Enterprise would 
lower the capital relief to 209 bps by multiplying together the loss 
timing factor (88 percent) and initial capital relief (237.5 bps).
    In the fourth step, the Enterprise would apply haircuts to 
previously calculated capital relief to adjust for counterparty credit 
risk from the reinsurance arrangement. In practice, the Enterprise 
would identify the reinsurer's uncollateralized exposure and apply a 
haircut. For the illustrative CRT, the Enterprise would first determine 
the reinsurer's uncollateralized exposure by subtracting the 
reinsurer's collateral amount ($2.8 million) from the reinsurer's 
exposure as follows:
[GRAPHIC] [TIFF OMITTED] TP17JY18.010

    The Enterprise would then consider the credit worthiness of the 
reinsurer and apply a haircut. For the illustrative CRT, the reinsurer 
has a counterparty financial strength rating of 3 and does not have a 
high level of mortgage

[[Page 33360]]

concentration risk. Further, the single-family whole loans and 
guarantees backing the illustrative CRT are performing and have a 30-
year term. Thus, the CP Haircut from Table 22 is 5.2 percent. The 
Enterprise would calculate counterparty credit risk from the reinsurer 
as the product of the CP Haircut and the reinsurer's uncollateralized 
exposure. The product would be converted into basis points as follows:
[GRAPHIC] [TIFF OMITTED] TP17JY18.011

    Lastly, the Enterprise would calculate total capital relief by 
adding up capital relief for each tranche in the CRT and reducing 
capital relief by any counterparty credit risk capital. For the 
illustrative CRT, the Enterprise would calculate total capital relief 
at 206.5 bps or capital relief after adjusting for ownership and loss 
timing (209 bps) less counterparty credit risk (2.5 bps).
Seasoned Single-Family CRT Capital Relief
    A seasoned single-family CRT differs from when it was newly-issued 
due to the changing risk profile on the whole loans and guarantees 
underlying the CRT. Therefore, under the proposed rule, the Enterprises 
would be required to re-calculate capital relief on their seasoned 
single-family CRT transactions with each submission of capital results.
    For each seasoned single-family CRT, the proposed rule would 
require the Enterprises to update the data elements originally 
considered. In particular, the proposed rule would require the 
Enterprises to update credit risk capital and expected losses on the 
underlying whole loans and guarantees, tranche structure, ownership, 
and counterparty credit risk.
CRT Prepayments
    The rate at which principal on a CRT's underlying loans is paid 
down (principal paydowns) affects the allocation of credit losses 
between the Enterprises and investors/reinsurers. Principal paydowns 
include regularly scheduled principal payments and unscheduled 
principal prepayments. In general, a CRT's tranches are paid down in 
the order of their seniority outlined in the CRT's transaction 
documents. For tranches with shared ownership, principal paydowns are 
allocated on a pro-rata basis. As CRT analysts have noted, under 
certain conditions unusually fast prepayments can erode the credit 
protection provided by the CRT by paying down the subordinate tranches 
and leave the Enterprises more vulnerable to credit losses. In 
particular, unexpectedly high prepayments can compromise the protection 
afforded by CRTs and reduce the CRT's benefit or capital relief.
    FHFA reviewed the effect on capital relief of applying stressful 
prepayment and loan delinquency projections to recent CRTs. FHFA 
concluded that deal features, specifically triggers, mitigate the 
effects of fast prepayments by diverting unscheduled principal 
prepayments to the Enterprise-held senior tranche. For example, a 
minimum credit enhancement trigger redirects prepayments to the senior 
tranche when the senior credit enhancement falls below a pre-specified 
threshold. Similarly, a delinquency trigger diverts prepayments when 
the average monthly delinquency balance (i.e., underlying single-family 
whole loans and guarantees that are 90 days or more delinquent, in 
foreclosure, bankruptcy, or REO) exceeds a pre-specified threshold.
    In addition to triggers, FHFA considered three other possible 
approaches to address the impact of stressful CRT prepayments. First, 
FHFA considered whether it would be desirable to include language in 
the proposed rule requiring specific triggers in the Enterprises' CRT 
transactions. However, FHFA decided against such language because 
variations across transactions complicate the establishment of fixed 
triggers that could be prudently applied uniformly across deals. 
Further, mandating a fixed set of triggers could reduce innovation in 
managing principal paydowns. Moreover, FHFA has the authority to review 
CRT terms before issuance and therefore can ensure transactions include 
appropriate triggers. Second, FHFA considered using a simple multiplier 
to reduce the capital relief from CRTs. However, this would 
inadequately capture differences in collateral, subordination, and 
trigger structures between transactions. Finally, FHFA considered an 
approach that would define capital relief based on a weighted average 
of losses arising from averaging cash flows derived under multiple 
prepayment scenarios. However, FHFA decided that the complexity and 
opacity of this approach would be inconsistent with the overall goal of 
having simple and transparent credit risk capital requirements.
    After considering these alternatives, FHFA believes that the 
proposed rule appropriately considers single-family CRT prepayments. 
However, FHFA is seeking public comment on CRT prepayments and is 
soliciting specific alternative approaches for addressing CRT 
prepayments in the proposed capital framework.
    Question 9: FHFA is soliciting detailed proposals for a simple and 
transparent approach to reflect the impact of stressful prepayments on 
CRT capital relief. What modifications or alternatives should FHFA 
consider and why?
    FHFA is soliciting comments on the capital relief treatment of 
single-family CRTs in the proposed rule. Providing capital relief for 
the Enterprises' credit risk transfer transactions is an aspect of the 
proposed rule that has received much consideration.
    Credit risk transfer transactions reduce risk to taxpayers. 
Providing capital relief for CRTs, no matter what form the CRTs take, 
gives the Enterprises an incentive to transfer credit risk to third 
parties to reduce the risk the Enterprises pose to taxpayers. The 
Enterprises design their credit risk transfer transactions to protect 
against the risk that an investor might not have the funds to cover 
agreed-upon credit losses--often referred to as reimbursement risk--
when such losses occur. The Enterprises use a number of different 
approaches to transfer credit risk, including transaction structures 
that are fully funded upfront and, therefore, have no reimbursement 
risk, and other transactions that require investors to partially or 
fully collateralize the investment to provide the Enterprises with 
assurance of available funds in the future. In addition, the credit 
risk protection provided by investors on fully funded CRT transactions 
is solely dedicated to absorbing credit risk and cannot be redirected 
for other uses. The Enterprises target loans that have the highest 
relative credit risk for CRT transactions, thereby providing a 
significant amount of credit risk protection.
    While CRT transactions are designed to provide credit risk 
protection for the

[[Page 33361]]

Enterprises, this protection is not the same as the protection provided 
by capital. Because third parties assume the credit risk on the 
specific loans included in CRT reference pools, the credit protection 
for individual CRTs is not fungible to cover losses on other loans, 
whereas capital can be used to absorb losses at the portfolio level and 
is available to cover all loans.
    In addition to the remaining reimbursement risk of certain CRT 
transactions, there is also the risk that loan prepayments could reduce 
the amount of credit risk protection able to be provided by investors. 
As discussed above, the Enterprises work to mitigate this prepayment 
risk by incorporating deal triggers into CRT transactions, but there 
remains risk that these triggers will not act as intended during a 
credit event. Additionally, the Enterprises' single-family CRTs have 
not been tested in a period of market stress because the programs 
started in 2013 and have expanded in a period of strong house price 
appreciation. Lastly, U.S. bank regulators have not given banks capital 
relief for credit risk transfers as FHFA has proposed to do in this 
rule for the Enterprises.
    Question 10: Does the proposed rule's approach of providing capital 
relief for CRTs adequately capture the risk and benefits associated 
with the Enterprises' CRT transactions? Should FHFA consider 
modifications or alternatives to the proposed rule's approach of 
providing capital relief for the Enterprises' CRTs, and if so, what 
modifications or alternatives, and why?
    Question 11: FHFA is soliciting comments on the proposed approaches 
for calculating CRT loss timing factors. Should the CRT loss timing 
factors be updated as the CRT ages? What modifications should FHFA 
consider and why?
c. Market Risk
    This section corresponds to Proposed Rule Sec. Sec.  1240.17 
through 1240.18.
Single-Family Whole Loans and Guarantees
    Single-family whole loans held in the Enterprises' portfolios have 
market risk from changes in value due to movements in interest rates 
and credit spreads. As the Enterprises currently hedge interest rate 
risk at the portfolio level, the market risk capital requirements in 
the proposed rule focus on spread risk.
    The proposed rule would determine market risk capital requirements 
for single-family whole loans using both single point estimates and the 
Enterprises' internal models.
Single-Family Re-Performing and Non-Performing Whole Loans
    The proposed rule would require an Enterprise to calculate market 
risk capital on single-family re-performing and non-performing whole 
loans using a single point estimate approach. The primary risk on these 
loans is credit risk and, in general, borrowers in these categories 
tend to have limited refinancing opportunities due to recent or current 
delinquencies. Therefore, re-performing and non-performing loans are 
relatively insensitive to prepayment risk, and FHFA believes the market 
risk profile of these loans would be sufficiently represented by a 
single point capital requirement.
    The proposed rule would assign a single point estimate of 4.75 
percent of the market value of assets for re-performing and non-
performing whole loans. This proposal reflects the average of the 
Enterprises' internal model estimates.
New Originations and Performing Seasoned Loans
    The proposed rule would require an Enterprise to calculate market 
risk capital on single-family new originations and performing seasoned 
whole loans using the internal models approach.
    In general, the complexity of the market risk profile on newly 
originated and performing seasoned whole loans is amplified due to high 
prepayment sensitivity. In particular, prepayment risk on performing 
whole loans may vary significantly across amortization terms, vintages, 
and mortgage rates. The high prepayment sensitivity might suggest that 
more simplified approaches, such as the single point estimate approach, 
would not capture key risk drivers. Also, spread shocks may vary across 
a variety of single-family loan characteristics. Thus, the spread 
duration approach, which relies on a constant spread shock, may not 
capture key single-family market movements. An internal models 
approach, however, would allow the Enterprises to differentiate market 
risk across multiple risk characteristics such as amortization term, 
vintage, and mortgage rates. Further, the Enterprises could account for 
important market risk factors, such as updated spread shocks, to 
reflect market changes.
Enterprise- and Ginnie Mae-Guaranteed Single-Family Mortgage-Backed 
Securities
    Enterprise and Ginnie Mae single-family MBS and CMOs held in the 
Enterprises' portfolios have market risk stemming from changes in value 
due to movements in interest rates and credit spreads. As discussed in 
Section II.C.4.c with regard to the market risk capital requirements 
for single-family whole loans, the Enterprises currently hedge interest 
rate risk at the portfolio level, and therefore the market risk capital 
requirements in the proposed rule focus on spread risk. In the proposed 
rule, the market risk capital requirement for Enterprise and Ginnie Mae 
single-family MBS and CMOs would be determined using the internal 
models approach and the Enterprises' internal models for market risk.
    In general, the complexity of the market risk profile on single-
family MBS and CMOs is amplified due to high prepayment sensitivity of 
the underlying collateral. Further, CMOs can often contain complex 
features and structures that alter prepayments across different 
tranches based on the CMO's structure. As a result, within this 
category of assets, spread durations may vary significantly across 
mortgage products, amortization terms, vintages and mortgage rates and 
tranches. The use of an Enterprise's internal models to calculate 
market risk capital requirements would allow the Enterprise to account 
for important market risk factors that affect spreads and spread 
durations.
    Notably, capital results that rely on internal model calculations 
can be opaque and result in different capital requirements across 
Enterprises for the same or similar exposures. Hence, the proposed rule 
would rely on an Enterprise's internal models solely only when the 
market risk complexity is sufficiently high that using a single point 
estimate or spread duration approach would inadequately represent the 
exposure's underlying single-family market risk. Further, internal 
models used in the determination of market risk capital requirements 
will be subject to ongoing supervisory review. Finally, an Enterprise's 
model risk management is subject to FHFA's 2013-07 Advisory Bulletin.
    Question 12: FHFA is soliciting comments on the proposed approaches 
for calculating market risk capital requirements for single-family 
whole loans. What modifications should FHFA consider and why?
    Question 13: FHFA is soliciting comments on the proposed approach 
for calculating market risk capital requirements for Enterprise and 
Ginnie Mae single-family MBS and CMOs. What modifications should FHFA 
consider and why?

[[Page 33362]]

d. Operational Risk
    This section corresponds to Proposed Rule Sec. Sec.  1240.19 
through 1240.20.
    As described in section II.C.2 above, the proposed rule would 
establish an operational risk capital requirement of 8 basis points for 
all assets. For single-family whole loans and guarantees, and 
Enterprise and Ginnie Mae single-family MBS and CMOs, the operational 
risk capital requirement would be 8 basis points of the unpaid 
principal balance of assets with credit risk or 8 basis points of the 
market value of assets with market risk.
e. Going-Concern Buffer
    This section corresponds to Proposed Rule Sec. Sec.  1240.21 
through 1240.22.
    As described in section II.C.3 above, the proposed rule would 
establish a going-concern buffer of 75 basis points for all assets. For 
single-family whole loans and guarantees, and Enterprise and Ginnie Mae 
single-family MBS and CMOs, the going-concern buffer would be 75 basis 
points of the unpaid principal balance of assets with credit risk or 75 
basis points of the market value of assets with market risk.
f. Impact

 Table 23--Fannie Mae and Freddie Mac Combined Estimated Total Risk-Based Capital Requirements for Single-Family
                    Whole Loans, Guarantees, and Related Securities as of September 30, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                Capital requirement
                                                                 -----------------------------------------------
                                                                     $billions          bps          Share (%)
----------------------------------------------------------------------------------------------------------------
Net Credit Risk.................................................           $91.2  ..............  ..............
    Credit Risk Transferred.....................................          (13.5)  ..............  ..............
                                                                 -----------------------------------------------
Post-CRT Net Credit Risk........................................            77.7             163              60
Market Risk.....................................................            14.2              30              11
Going-Concern Buffer............................................            34.9              73              27
Operational Risk................................................             3.7               8               3
                                                                 -----------------------------------------------
    Total Capital Requirement...................................           130.5             273             100
                                                                 -----------------------------------------------
        Total UPB, $billions....................................         4,778.3  ..............  ..............
----------------------------------------------------------------------------------------------------------------


Table 24--Fannie Mae and Freddie Mac Combined Estimated Credit Risk Capital Requirements for Single-Family Whole
                        Loans and Guarantees as of September 30, 2017--by Loan Category *
----------------------------------------------------------------------------------------------------------------
                                                                      Capital                         Capital
                                                                    requirement         UPB         requirement
                                                                    ($billions)     ($billions)        (bps)
----------------------------------------------------------------------------------------------------------------
New Originations................................................            $7.6            $296             257
Performing Seasoned Loans.......................................            52.2           3,787             138
Re-Performing Loans.............................................            19.7             472             418
Non-Performing Loans............................................            11.8             102           1,149
                                                                 -----------------------------------------------
    Net Credit Risk.............................................            91.2           4,657             196
    Credit Risk Transferred.....................................          (13.5)  ..............  ..............
                                                                 -----------------------------------------------
        Post-CRT Net Credit Risk................................            77.7           4,657             167
----------------------------------------------------------------------------------------------------------------
* Excludes both Enterprises' retained portfolio holdings of MBS guaranteed by the other Enterprise, and Ginnie
  Mae MBS.

5. Private-Label Securities
    This section corresponds to Proposed Rule Sec. Sec.  1240.24 
through 1240.29.
    The Enterprises have exposure to residential private-label 
securities (PLS) in that they hold PLS in portfolio as investments and 
guarantee PLS that have been re-securitized by an Enterprise (PLS 
wraps). The proposed rule would establish risk-based capital 
requirements for the credit risk associated with private-label 
securities, including PLS wraps, and the market risk associated with 
private-label securities with market risk exposure. The risk-based 
capital requirement for PLS and PLS wraps would also include a risk-
invariant operational risk capital requirement and a going-concern 
buffer.
Credit Risk
    The proposed rule would use the SSFA methodology to determine the 
credit risk capital requirement for private-label securities with 
credit risk exposure in a manner based upon how banks use the SSFA to 
determine the capital requirements for securitized assets. For each 
private-label security, the proposed rule would set forth a minimum 
risk-based capital requirement as provided in the SSFA methodology, 
which would be adjusted based upon SSFA methodology to account for the 
performance of the underlying collateral and the level of 
subordination. The SSFA formulas would impose high capital requirements 
on subordinated risky tranches of a securitization relative to more 
senior positions that are less subject to credit losses.
    Defining the PLS capital requirements using the SSFA methodology 
provides two advantages. First, the SSFA is a relatively simple and 
transparent approach to calculate private-label securities capital 
requirements. Second, using the SSFA methodology would create 
consistency in capital calculations between the Enterprises and private 
industry, as the banking agencies apply the SSFA to banking 
institutions subject to their jurisdiction. While there are 
shortcomings associated with using the SSFA methodology, the relatively 
high data demands associated with alternative loan-level approaches, 
along with the Enterprises' relatively limited amount of PLS holdings, 
lead

[[Page 33363]]

FHFA to believe that the straightforward SSFA methodology would be 
appropriate for determining credit risk capital requirements for PLS 
and PLS wraps.
Market Risk
    Because PLS wraps do not expose the Enterprises to market risk, PLS 
wraps would have a zero market risk capital requirement. For each 
private-label security with market risk exposure, the proposed rule 
would define market risk capital only with respect to spread risk, 
namely a loss in value of an asset relative to a risk free or funding 
benchmark due to changes in perceptions of performance or liquidity. 
Absent hedging, changes in interest rates would also have a direct 
effect on the value of private label securities. However, the 
Enterprises make extensive use of callable debt and derivatives to 
hedge interest rate risk. Therefore, in the proposed rule, market risk 
would affect the capital requirements for private-label securities only 
through changes in spreads.
    In particular, the market risk capital requirement for PLS would be 
defined as the product of a change in the spread of the private-label 
security (spread shock) and the sensitivity of a private-label 
security's expected price to changes in the private-label security's 
spread (spread duration). The constant spread shock would be set at 265 
basis points, reflecting estimates provided to FHFA by the Enterprises, 
while the Enterprises would use their own internal approaches to 
estimate the spread duration for each PLS in order to account for 
variation in spread durations across private-label securities. Finally, 
the product of the PLS market risk capital requirement in basis points 
and the market value of a private-label security would yield the PLS 
market risk capital requirement in dollars. Internal models used in the 
determination of market risk capital requirements would be subject to 
ongoing supervisory review.
Operational Risk
    As described in section II.C.2 above, the proposed rule would 
require the Enterprises to hold an operational risk capital requirement 
of 8 bps for all assets. For private label securities, the operational 
risk capital requirement would be 8 bps of the securities' market 
value.
Going-Concern Buffer
    As described in section II.C.3 above, the proposed rule would 
require the Enterprises to hold a going-concern buffer of 75 bps for 
all assets. For private label securities, the going-concern buffer 
would be 75 bps of the securities' market value.
Impact

    Table 25--Fannie Mae and Freddie Mac Combined Estimated Risk-Based Capital Requirements for Private-Label
                                       Securities as of September 30, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                Capital requirement
                                                                 -----------------------------------------------
                                                                     $billions          bps          Share (%)
----------------------------------------------------------------------------------------------------------------
Credit Risk.....................................................            $2.2           1,502              64
Market Risk.....................................................             1.1             767              33
Going-Concern Buffer............................................             0.1              60               3
Operational Risk................................................            0.01               6               0
                                                                 -----------------------------------------------
    Total Capital Requirement...................................             3.4           2,336             100
                                                                 -----------------------------------------------
        Total UPB, $billions....................................            14.4  ..............  ..............
----------------------------------------------------------------------------------------------------------------

    Question 14: FHFA is soliciting comments on the proposed risk-based 
capital requirements for private-label securities. What modifications 
should FHFA consider and why?
6. Multifamily Whole Loans, Guarantees, and Related Securities
    This section corresponds to Proposed Rule Sec. Sec.  1240.31 
through 1240.45.
Overview
    The proposed rule would establish risk-based capital requirements 
for the Enterprises' multifamily businesses. It is important to specify 
separate multifamily capital requirements in order to capture the 
unique nature of the multifamily lending business and its particular 
risk drivers. A typical multifamily loan, including those packaged 
together into mortgage-backed securities (MBS), is roughly $10 million, 
requires a 10-year balloon payment, and includes a 30-year amortization 
period. In addition, multifamily loans finance the acquisition and 
operation of commercial property collateral, as opposed to single-
family dwellings. Multifamily properties are typically apartment 
buildings owned by real estate investors who rent the apartment units 
expecting to realize a profit after paying property operating and 
financing expenses.
    The proposed rule would apply to multifamily whole loans, 
guarantees, and related securities held for investment. Multifamily 
whole loans are those that the Enterprises keep in their portfolios 
after acquisition. Multifamily guarantees are guarantees provided by 
the Enterprises of the timely receipt of payments to investors in 
mortgage-backed securities that have been issued by the Enterprises or 
other security issuers and are backed by previously acquired 
multifamily whole loans. Except in cases where the Enterprises transfer 
credit risk to third-party private investors, the Enterprises retain 
the credit risk from whole loans and guarantees. The Enterprises also 
retain market risk on whole loans held in portfolio and loans that they 
retain but intend to sell at a later date.
    To implement the proposed capital requirements, the Enterprises 
would use a set of multifamily grids and risk multipliers to calculate 
credit risk capital, as well as a collection of straightforward 
formulas to calculate market risk capital, operational risk capital, 
and a going-concern buffer.
    The proposed rule would first establish a framework through which 
the Enterprises would determine their gross multifamily credit risk 
capital requirements. The proposed methodology is simple and 
transparent, relying on a set of look-up tables (grids and risk 
multipliers) that take into account several important loan 
characteristics including debt-service-coverage ratio (DSCR), loan-to-
value ratio (LTV), payment performance, loan term, interest-only (IO), 
loan size, and special products, among others.

[[Page 33364]]

    The proposed grid and multiplier framework is consistent with 
existing financial regulatory regimes and would thereby facilitate 
comparison and examination of the Enterprises' risk-based capital 
requirements. FHFA believes that this straightforward and transparent 
approach, as opposed to one involving a complex set of credit models 
and econometric equations, would provide sufficient risk 
differentiation across the Enterprises' different types of multifamily 
business exposures without placing an undue compliance burden on the 
Enterprises.
    The proposed rule would then provide a mechanism for the 
Enterprises to calculate multifamily capital relief by reducing gross 
credit risk capital requirements based on the amount of loss shared or 
risk transferred to other parties. The proposed CRT calculation would 
include a capital requirement for multifamily counterparty credit risk 
stemming from contractual arrangements with lenders, re-insurers, and 
other counterparties with which the Enterprises engage. In doing so, 
the rule would account for differences in the Enterprises' multifamily 
business models.
    The proposed rule would establish market risk capital requirements 
for multifamily whole loans using the spread duration approach. For 
multifamily securities held for investment, the parameters would apply 
to two asset types: Whole loans and Enterprise--and Ginnie Mae-issued 
mortgage-backed securities (MBS).
    In addition, the proposed rule would establish an operational risk 
capital requirement for the Enterprises' multifamily businesses that is 
invariant to risk. The proposed rule would base the operational risk 
capital requirement on the Basel Basic Indicator Approach, which 
accounts for gross income and assets by product line.
    Lastly, the proposed rule would establish a going-concern buffer 
for the Enterprises' multifamily businesses that is invariant to risk. 
The purpose of the going-concern buffer is to allow the Enterprises, in 
this case as it pertains to their multifamily businesses, to remain as 
functioning entities during and after a period of severe financial 
distress.
Multifamily Business Models
    The proposed rule would apply to both Enterprises equally. However, 
when appropriate, the proposed rule would account for differences in 
the Enterprises' multifamily business models. These differences are 
evident, for example, when considering certain elements of the proposed 
rule related to credit risk transfer.
    As of late 2017, Fannie Mae's multifamily business relied on the 
Delegated Underwriting and Servicing (DUS) program. The DUS program is 
a loss-sharing program that seeks to facilitate the implementation of 
common underwriting and servicing guidelines across a defined group of 
multifamily lenders. The number of multifamily lenders in the DUS 
program has historically ranged between 25 and 30 since the program's 
inception in the late 1980s. Fannie Mae typically transfers about one-
third of the credit risk to those lenders, while retaining the 
remaining two-thirds of the credit risk plus the counterparty risk 
associated with the DUS lender business relationship. The proportion of 
risk transferred to the lender may be more or less than one-third under 
a modified version of the typical DUS loss-sharing agreement.
    In contrast, as of late 2017, Freddie Mac's multifamily model 
focused almost exclusively on structured, multi-class securitizations. 
While Freddie Mac has a number of securitization programs for 
multifamily loans, the most heavily used program is the K-Deal program. 
Under the K-Deal program, which started in 2009, Freddie Mac sells a 
portion of unguaranteed bonds (mezzanine and subordinate), generally 10 
to 15 percent, to private market participants. These sales typically 
result in a transfer of a very high percentage of, if not all of, the 
credit risk. Freddie Mac generally assumes credit and market risk 
during the period between loan acquisition and securitization. In 
addition, after securitization, Freddie Mac generally retains a portion 
of the credit risk through ownership or guarantee of senior K-Deal 
tranches.
    Despite these differences in the Enterprises' multifamily business 
models, the proposed rule would accommodate both Enterprises' current 
lending practices, and would not preclude them from adopting a version 
of one another's lending practices in the future. Specifically, the 
proposed rule would explicitly include variations in the estimation of 
required credit risk capital under each Enterprise's risk transfer 
approach, but would not limit an Enterprise to a particular approach.
Rule Framework and Implementation
    The proposed rule would establish risk-based capital requirements 
for the Enterprises' multifamily businesses, including their whole 
loans and guarantees and securities held for investment. Using the 
proposed capital requirements, the Enterprises would calculate the 
minimum amount of funds needed to support their multifamily operations 
under stressed economic conditions, as discussed briefly above and in 
detail below. The proposed multifamily capital requirements would 
comprise the following components: Credit risk capital, including 
adjustments for credit risk transfers; market risk capital; operational 
risk capital; and a going-concern buffer. Each component is discussed 
individually below.
a. Credit Risk
    This section corresponds to Proposed Rule Sec. Sec.  1240.31 
through 1240.36.
Multifamily Whole Loans and Guarantees
    The proposed rule would establish credit risk capital requirements 
for the Enterprises' multifamily whole loans and guarantees. The 
multifamily credit risk capital requirements would be determined by the 
minimum funding necessary to cover the difference between estimated 
lifetime stress losses in severely adverse economic conditions and 
expected losses. For the purpose of the proposed rule, the multifamily-
specific stress scenario involves two parameters:
    <bullet> Net Operating Income (NOI), where NOI represents Gross 
Potential Income (gross rents) net of vacancy and operating expenses, 
and
    <bullet> Property values.
    Adverse economic conditions are generally accompanied by either a 
decrease in expected property revenue or an increase in perceived risk 
in the multifamily asset class, or both. A decrease in expected 
occupancy would lead to a decline in income generated by the property, 
or a lower NOI, while an increase in perceived risk would lead to an 
increase in the capitalization rate used to discount the NOI when 
assessing property value. A capitalization rate, or cap rate, is 
defined as NOI divided by property value, so if NOI is held constant, 
an increase in the cap rate is directly related to a decrease in 
property values. For the purpose of the proposed rule, the multifamily-
specific stress scenario assumes an NOI decline of 15 percent and a 
property value decline of 35 percent. This stress scenario is 
consistent with market conditions observed during the recent financial 
crisis, views from third-party market participants and data vendors, 
and assumptions behind the Dodd-Frank Act Stress Test (DFAST) severely 
adverse scenario. The estimated differences between stress losses in a 
severely adverse scenario and expected losses are reflected in the 
multifamily credit risk capital grids discussed below.

[[Page 33365]]

    Under the proposed rule, the Enterprises would calculate credit 
risk capital for multifamily whole loans and guarantees by completing 
the following simplified steps:
    (1) Determine gross multifamily credit risk capital through the use 
of multifamily-specific credit risk capital grids;
    (2) Adjust gross multifamily credit risk capital for additional 
risk characteristics using a set of multifamily-specific risk 
multipliers; and
    (3) Determine net multifamily credit risk capital by adjusting 
gross multifamily credit risk capital for credit risk transfers.
Base Credit Risk Capital Requirements
    The proposed rule would require the Enterprises to determine base 
multifamily credit risk capital using a set of two look-up tables, or 
grids--one for each multifamily segment. Accordingly, for the purpose 
of the proposed rule, the Enterprises would divide their multifamily 
whole loans and guarantees into two segments by interest rate contract: 
One segment for whole loans and guarantees with fixed rate mortgages 
(FRMs), and one segment for whole loans and guarantees with adjustable 
rate mortgages (ARMs). Multifamily whole loans that have both a fixed 
rate period and an adjustable rate period, also known as hybrid loans, 
would be classified and treated as a multifamily FRM during the fixed 
rate period, and classified and treated as a multifamily ARM during the 
adjustable rate period.
    Each segment would have a unique two-dimensional multifamily credit 
risk capital grid which the Enterprises would use to determine base 
credit risk capital for each whole loan and guarantee before applying 
subsequent credit risk multipliers, discussed in the next section. The 
dimensions of the multifamily credit risk capital grids would be ranges 
based on two important underlying multifamily loan characteristics: 
Debt-service-coverage ratio (DSCR) and loan-to-value ratio (LTV). These 
two risk factors are crucial for forecasting the future performance of 
loans on commercial real estate properties, including multifamily 
properties. DSCR is the ratio of property Net Operating Income (NOI) to 
the loan payment. A DSCR greater than 1.0 indicates that the property 
generates sufficient funds to cover the loan obligation, while the 
opposite is true for a DSCR less than 1.0. LTV, in turn, is the ratio 
of loan amount to property value. In commercial real estate financing, 
a DSCR of 1.25 and an LTV of 80 percent represent common and reasonable 
standards for underwriting and performance evaluation purposes.
    In the proposed rule, the multifamily credit risk capital grids 
were populated using model estimates from both Enterprises, averaged to 
determine the capital requirement associated with each cell in the 
multifamily credit risk capital grids. To derive the estimates, the 
Enterprises were asked to run their multifamily credit models using the 
multifamily-specific stress scenario described above and a synthetic 
loan with a baseline risk profile with respect to risk factors other 
than DSCR and LTV. Specifically, the proposed FRM credit risk capital 
grid was populated using loss estimates (stress losses minus expected 
losses) for a multifamily loan with varying DSCR and LTV combinations 
and the following risk characteristics: $10 million loan amount, 10-
year balloon with a 30-year amortization period, non-interest-only, not 
a special product, and never been delinquent or modified. Similarly, 
the proposed ARM credit risk capital grid was populated using loss 
estimates (stress losses minus expected losses) for a multifamily loan 
with varying DSCR and LTV combinations and the following risk 
characteristics: 3 percent origination interest rate, $10 million loan 
amount, 10-year balloon with a 30-year amortization period, non-
interest-only, not a special product, and never been delinquent or 
modified. Thus, each cell of the proposed FRM (ARM) credit risk capital 
grid represents the average estimated difference, in basis points, 
between stress losses and expected losses for synthetic FRM (ARM) loans 
described above with a DSCR and LTV in the tabulated ranges. This 
capital requirement, in basis points, would be applied to the unpaid 
principal balance (UPB) of each multifamily whole loan and guarantee 
held by the Enterprises with exposure to credit risk.
    The proposed rule would require that the Enterprises use the 
multifamily credit risk capital grids in their regulatory capital 
calculations for both newly acquired multifamily whole loans and 
guarantees, as well as seasoned multifamily whole loans and guarantees. 
A newly acquired multifamily whole loan or guarantee is a whole loan or 
guarantee originated within the prior 5 months, while a seasoned 
multifamily whole loan or guarantee is a whole loan or guarantee 
originated more than 5 months ago. For newly acquired whole loans and 
guarantees, the proposed rule would require the Enterprises to use 
DSCRs and LTVs determined at acquisition to calculate capital 
requirements using the multifamily credit risk capital grids. For 
seasoned whole loans and guarantees, the proposed rule would require 
the Enterprises to use DSCRs and LTVs updated as of the relevant 
capital calculation date, also known as the mark-to-market DSCR 
(MTMDSCR) and mark-to-market LTV (MTMLTV), to calculate capital 
requirements using the multifamily credit risk capital grids.
    The proposed multifamily credit risk capital grids for the FRM and 
ARM loan segments are presented in Tables 26 and 27, respectively:
BILLING CODE 8070-01-P

[[Page 33366]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.012


[[Page 33367]]


[GRAPHIC] [TIFF OMITTED] TP17JY18.013

BILLING CODE 8070-01-C
    The proposed multifamily credit risk capital grids provide for a 
straightforward determination of multifamily credit risk capital that 
is easy to interpret. In both multifamily credit risk capital grids, 
the credit risk capital requirement would increase as DSCR decreases 
(moving toward the top of a grid) and as LTV increases (moving toward 
the right of the grid). Thus, the Enterprises would generally be 
required to hold more capital for a multifamily whole loan or guarantee 
with a low DSCR and a high LTV (the upper-right corner of each grid) 
than for a multifamily whole loan or guarantee with a high DSCR and a 
low LTV (the lower-left corner of each grid).
    The risk factor breakpoints and ranges represented in the 
multifamily credit risk capital grids were chosen following internal 
FHFA analysis and discussions with the Enterprises. After reviewing the 
distributions of the Enterprises' multifamily whole loan and guarantee 
unpaid principal balances (UPBs) across both dimensional risk factors 
(DSCR and LTV), FHFA concluded that the proposed breakpoints and ranges 
would combine to form sufficiently granular pairwise buckets without 
sacrificing simplicity or imposing an undue compliance burden on the 
Enterprises. Furthermore, for ease of interpretation and 
implementation, the proposed rule would contain one set of DSCR and LTV 
ranges for both newly acquired and seasoned whole loans and guarantees.

[[Page 33368]]

However, as discussed, and as labeled on the grids, the risk factor 
dimensions would apply to acquisition DSCR and LTV for newly acquired 
whole loans and guarantees, and updated MTMDSCR and MTMLTV for seasoned 
whole loans and guarantees.
    The proposed rule would require a unique treatment for interest-
only (IO) loans. IO loans allow for payment of interest without any 
principal amortization during all or part of the loan term, creating 
increased amortization risk and additional leveraging incentives for 
the borrower. To partially capture these increased risks, the proposed 
rule would require the Enterprises to use the fully amortized payment 
to calculate DSCR (or MTMDSCR) during the IO period in order to 
calculate base capital requirements using one of the two multifamily 
credit risk capital grids. Specifically, the proposed rule would 
require the Enterprises to assign each multifamily IO loan into a 
multifamily loan segment, either FRM or ARM, and to calculate a base 
credit risk capital requirement for each IO whole loan and guarantee 
using the corresponding segment-specific multifamily credit risk 
capital grid, where the DSCR (in the case of a new acquisition) or the 
MTMDSCR (in the case of a seasoned loan) is based on the IO loan's 
fully amortized payment.
Gross Credit Risk Capital Requirements
    After the Enterprises calculate base credit risk capital 
requirements for multifamily whole loans and guarantees using the 
multifamily credit risk capital grids, the proposed rule would require 
the Enterprises to adjust these capital requirements to account for 
additional risk characteristics using a set of multifamily-specific 
risk multipliers. The proposed risk multipliers would refine 
multifamily base credit risk capital requirements for whole loans and 
guarantees that possess additional risk factors beyond those reflected 
in the dimensions of the multifamily credit risk capital grids, and 
would include considerations for both seasoned loans and new 
acquisitions. Accordingly, the Enterprises would apply these risk 
multipliers on top of the base credit risk capital requirements 
obtained from the multifamily credit risk capital grids. The proposed 
rule would include multipliers to capture variations in the following 
multifamily loan characteristics: Payment performance, interest-only, 
loan term, amortization term, loan size, and special products.
    The proposed multifamily risk multipliers represent common 
characteristics that increase or decrease the riskiness of a particular 
multifamily whole loan or guarantee. The proposed rule would provide a 
mechanism through which multifamily credit risk capital requirements 
would be adjusted and refined up or down to reflect a more or less 
risky loan profile, respectively. FHFA believes that risk multipliers 
would provide for a simple and transparent characterization of the 
risks associated with different types of multifamily whole loans and 
guarantees, and an effective way of adjusting credit risk capital 
requirements for those risks. Although the specified risk 
characteristics are not exhaustive, they capture key commercial real 
estate loan performance drivers, and are common in commercial real 
estate loan underwriting and rating. Therefore, FHFA believes the use 
of risk multipliers in general, and the proposed multipliers in 
particular, would facilitate analysis of the Enterprises' multifamily 
credit risk capital requirements while mitigating concerns associated 
with compliance and complex implementation.
    The proposed multifamily risk multipliers would capture variations 
in risk specific to individual whole loans and guarantees, and augment 
the base credit risk capital requirements. The numerical multipliers 
populating the multifamily risk multiplier table were determined using 
FHFA staff analysis and expertise, along with the Enterprises' 
contributions of model results and business expertise. Specifically, 
FHFA asked the Enterprises to run their multifamily credit models using 
the multifamily-specific stress scenario described above and synthetic 
loans with a baseline risk profile with respect to risk factors other 
than DSCR and LTV, in the same way the Enterprises populated the 
multifamily credit risk capital grids. However, FHFA then asked the 
Enterprises to vary the additional risk factors to estimate the risk 
factors' multiplicative effects on the Enterprises' loss estimates 
(stress losses minus expected losses). In general, the multiplier 
values estimated by the Enterprises were consistent with one another in 
magnitude and direction. Using judgement, FHFA combined the estimates 
to determine the final multifamily risk multiplier values.
    The proposed rule would require that multifamily whole loans and 
guarantees with characteristics similar to, and within a certain range 
of, the risk characteristics of the synthetic loans underlying the 
multifamily credit risk capital grids would take a multiplier of 1.0. 
Risk factor values dissimilar to the characteristics of the synthetic 
loans would be assigned risk multiplier values greater than or less 
than 1.0, such that the total risk multiplier applied to a given 
multifamily whole loan or guarantee could be above 1.0, below 1.0, or 
1.0, depending on how the risk factor values compare to the pertinent 
risk factor values in the synthetic loans. A multiplier value above 1.0 
would be assigned to risk factor values that represent riskier loan 
characteristics, while a multiplier value below 1.0 would be assigned 
to risk factor values that represent less risky characteristics. For 
each multifamily whole loan and guarantee, the individual risk 
multipliers would be multiplicative, and their product would be applied 
to the gross credit risk capital requirements determined by the 
multifamily credit risk capital grids.
    The proposed multifamily risk multiplier values are presented in 
Table 28:

                 Table 28--Multifamily Risk Multipliers
------------------------------------------------------------------------
         Risk factor             Value or range        Risk multiplier
------------------------------------------------------------------------
Payment Performance.........  Performing..........  1.00.
                              Delinquent..........  1.10.
                              Re-Performing         1.10.
                               (without
                               Modification).
                              Modified............  1.20.
Interest-Only...............  Not Interest-Only...  1.00.
                              Interest-Only.......  1.10.
Original/Remaining Loan Term  Loan Term <= 1Yr....  0.70.
                              1Yr < Loan Term <=    0.75.
                               2Yr.
                              2Yr < Loan Term <=    0.80.
                               3Yr.
                              3Yr < Loan Term <=    0.85.
                               4Yr.

[[Page 33369]]

 
                              4Yr < Loan Term <=    0.90.
                               5Yr.
                              5Yr < Loan Term <=    0.95.
                               7Yr.
                              7Yr < Loan Term <=    1.00.
                               10Yr.
                              Loan Term > 10Yr....  1.15.
Original Amortization Term..  Amort. Term <= 20Yr.  0.70.
                              20Yr < Amort. Term    0.80.
                               <= 25Yr.
                              25Yr < Amort. Term    1.00.
                               <= 30Yr.
                              Amort. Term > 30Yr..  1.10.
Original Loan Size..........  Loan Size <= $3M....  1.45.
                              $3m < Loan Size <=    1.15.
                               $5M.
                              $5m < Loan Size <=    1.00.
                               $10M.
                              $10m < Loan Size <=   0.80.
                               $25M.
                              Loan Size > $25M....  0.70.
Special Products............  Government-           0.60.
                               Subsidized.
                              Not a Special         1.00.
                               Product.
                              Student Housing.....  1.15.
                              Rehab/Value-Add/      1.25.
                               Lease-Up.
                              Supplemental........  Use FRM or ARM
                                                     Capital Grid by
                                                     adding supplemental
                                                     UPB to the base
                                                     loan and
                                                     recalculating DSCR
                                                     and LTV.
------------------------------------------------------------------------

    Each multifamily risk factor represented in Table 28 can take 
multiple values, and each value or range of values has a risk 
multiplier associated with it. FHFA determined these values and ranges 
after analyzing the Enterprises' multifamily portfolios and the 
associated distributions of UPBs, and subsequent to significant 
discussions both internally and with the Enterprises. FHFA believes 
that the proposed values and ranges would provide an appropriate level 
of granularity in the risk multiplier framework, both within each risk 
factor and cumulatively across risk factors, to sufficiently capture 
the variations in observable risk given the Enterprises' multifamily 
businesses and without imposing an undue compliance or implementation 
burden on the Enterprises. The risk factors in the multifamily risk 
multiplier table are:
    <bullet> Payment performance. The payment performance risk 
multiplier captures risks associated with historical payment 
performance of whole loans and guarantees. In the proposed risk 
multiplier table, multifamily whole loans and guarantees would be 
assigned one of four values: Performing, delinquent (defined as 30-days 
for multifamily whole loans and guarantees in the context of the 
proposed rule), re-performing (without modification), and modified. A 
performing loan is one that has never been delinquent in its payments; 
a delinquent loan is one that is not current in its payments at the 
time of the capital calculation; a re-performing loan is one that is 
current in its payments at the time of the capital calculation, but has 
been delinquent in its payments at least once since origination and has 
cured without modification; and a modified loan is one that is current 
in its payments at the time of the capital calculation, but has been 
modified at least once since origination or has gone through a workout 
plan. In the proposed rule, the Enterprises would be required to hold 
more capital for multifamily whole loans and guarantees that have a 
delinquency and/or modification history than for those that do not. 
Specifically, performing whole loans and guarantees would receive a 
risk multiplier of 1.0, while delinquent, re-performing, and modified 
whole loans and guarantees would receive a risk multiplier greater than 
1.0.
    <bullet> Interest-only. The interest-only (IO) risk multiplier 
captures risks associated with IO whole loans and guarantees during the 
IO period. As discussed earlier, IO loans are generally considered 
riskier than non-IO loans, and the proposed rule would partially 
account for this increased amortization and leveraging risk by 
requiring the Enterprises to use fully amortized payments to calculate 
DSCR (for new acquisitions) and MTMDSCR (for seasoned loans) for use in 
the multifamily credit risk capital grids. The use of the amortized 
payment would lower the DSCR, resulting in a higher capital requirement 
all else equal. In addition, the proposed rule would further account 
for IO risk in the risk multiplier table. Specifically, non-IO whole 
loans and guarantees would receive a risk multiplier of 1.0, while IO 
whole loans and guarantees would receive a risk multiplier of 1.1 
during the IO period.
    <bullet> Original or remaining loan term. The loan term risk 
multiplier captures risks associated with the term of a multifamily 
whole loan or guarantee, either the original loan term for new 
acquisitions or the remaining loan term for seasoned loans. The 
majority of the Enterprises' multifamily whole loans and guarantees 
have a loan term of 5 years or longer, and in general, whole loans and 
guarantees with a shorter term are less risky than those with a longer 
term. Loans with shorter loan terms carry relatively less uncertainty 
about eventual changes in property performance and future refinancing 
opportunities, while loans with longer loan terms carry relatively 
higher uncertainty about the borrower's ability to refinance in the 
future. In the proposed rule, a 10-year loan term would be considered a 
baseline risk, so whole loans and guarantees with a loan term between 7 
years and 10 years would receive a risk multiplier of 1.0. The 7- to 
10-year range represents a conservative range FHFA believes is 
appropriate. Whole loans and guarantees with loan terms shorter than 7 
years would receive risk multipliers less than 1.0, and whole loans and 
guarantees with loan terms longer than 10 years would receive a risk 
multiplier greater than 1.0. Whole loans and guarantees that are new 
acquisitions would use the original loan term, while those that are 
seasoned would use the remaining loan term.
    <bullet> Original amortization term. The amortization term risk 
multiplier captures risks associated with the amortization term of a 
multifamily whole loan or guarantee. In general, whole loans and 
guarantees with a

[[Page 33370]]

shorter repayment period face less risk of a borrower defaulting on its 
payments than do those with a longer repayment period. The most common 
amortization term for multifamily whole loans and guarantees is 30 
years, even though most have an original loan term with a balloon 
payment due earlier, often in 10 years. While amortization terms can 
potentially take any value, FHFA believes that given the very high 
number of whole loans and guarantees with an amortization term between 
25 and 30 years, the values represented in the risk multiplier table 
would sufficiently account for the differences in risk associated with 
amortization term. In the proposed rule, a 30-year amortization term 
would represent a baseline level of risk, and multifamily whole loans 
and guarantees with a 30-year amortization term would receive a risk 
multiplier of 1.0. Whole loans and guarantees with an amortization term 
less than 25 years would receive a risk multiplier less than 1.0, while 
whole loans and guarantees with an amortization term greater than 30 
years would receive a risk multiplier of 1.1.
    <bullet> Original loan size. Multifamily whole loans and guarantees 
with larger original loan balances are generally considered less risky 
than those with smaller balances, because larger balances are usually 
associated with larger investors with more access to capital and 
experience. In addition, the collateral securing a large loan is often 
a larger, more established, and/or newer property. Alternatively, whole 
loans and guarantees with smaller original balances are often 
associated with investors with limited funding and smaller, less 
competitive properties. In the proposed rule, an original loan size of 
$10 million represents a baseline level of risk, and multifamily whole 
loans and guarantees meeting that criterion would receive a risk 
multiplier of 1.0. Whole loans and guarantees with an original loan 
balance greater than $10 million would receive a risk multiplier less 
than 1.0, and whole loans and guarantees with an original loan balance 
less than $5 million would receive a risk multiplier greater than 1.0.
    <bullet> Special products. The final risk factor in the multifamily 
risk multiplier table captures risks associated with certain special 
products. The special products represented in the table contain risks 
unique to each product, and, while not exhaustive, were selected for 
their importance based on FHFA staff analysis and expertise and 
pursuant to discussions with the Enterprises and their collective 
multifamily business experiences. The special products, discussed 
individually below, are government subsidized, student housing, rehab/
value-add/lease-up, and supplemental.
    In the context of the proposed rule, multifamily whole loans and 
guarantees that are government-subsidized have financing that includes 
HUD or FHA subsidies. These subsidies could have value to an investor 
or to a renter, depending on the specific HUD or FHA program used, 
through their effect on the loan balance or on any tax credits related 
to the operation of the property supporting the loan. The benefits of 
these subsidies to investors and/or renters generally lead to property 
incomes that are less volatile than incomes associated with otherwise 
comparable whole loans and guarantees. Less volatile income broadly 
translates to lower risk, and as a result, government-subsidized whole 
loans and guarantees would be assigned a risk multiplier lower than 
1.0.
    Student housing loans provide financing for the operation of 
apartment buildings for college students. The rental periods for units 
in these properties often correspond with the institution's academic 
calendar, so the properties have a high annual turnover of occupants. 
Student renters, by and large, are not as careful with the use and 
maintenance of the rental units as more mature households. As a result, 
apartment buildings focusing on student housing customarily have more 
volatile occupancy and less predictable maintenance expenses. In the 
proposed rule, this would imply higher risk, which would lead to a risk 
multiplier greater than 1.0 for student housing whole loans and 
guarantees.
    The third type of special product in the risk multiplier table 
would include loans issued to finance rehab/value-add/lease-up 
projects. In the context of the proposed rule, rehab and value-add 
projects are different types of renovations, where a rehab project is a 
like-for-like renovation and a value-add project is one that increases 
a property's value by adding a new feature to an existing property or 
converts one component of a property into a more marketable feature, 
such as converting unused storage units into a fitness center. A lease-
up property is one that is recently constructed and still in the 
process of securing tenants for occupancy. Recently built properties, 
and those subject to improvements, typically require more intense 
marketing efforts in the early stages of property operation. It often 
takes longer for these properties to reach and stabilize at reasonable 
occupancy levels. In the proposed rule, this would elevate the 
property's risk, which would lead to a risk multiplier greater than 1.0 
for whole loans and guarantees backing these properties.
    Finally, supplemental loans, in the context of the proposed rule, 
are multifamily loans issued to a borrower for a property for which the 
borrower has previously received a loan. There can be more than one 
supplemental loan. These loans, by definition, increase loan balances, 
which would lead to higher LTVs and could lead to lower DSCRs, which 
could lead to higher risk. Therefore, the proposed rule would require 
the Enterprises to account for this potentially higher risk by 
recalculating DSCRs and LTVs for the original and supplemental loans 
using combined loan balances and income/payment information, and 
calculating the capital requirement for a supplemental loan as the 
marginal increase in total capital due to the addition of the 
supplemental loan. In practice, however, supplemental loans do not 
exist in a vacuum and the capital calculation for supplemental loans 
could be slightly more complicated than just described. For example, a 
higher loan balance due to a supplemental loan could push the total 
loan balance into a loan size bucket with a size multiplier smaller 
than it had before the supplemental was added, which could lower the 
overall credit risk capital requirement for the group of loans as a 
whole.
Multifamily Risk Multiplier Floor
    In the proposed rule, multifamily risk multipliers would adjust 
base credit risk capital requirements in a multiplicative manner. As a 
result, combinations of overlapping characteristics could potentially 
result in an extremely low risk assessment of certain multifamily whole 
loans and guarantees, which would arguably undermine the conservative 
approach to capital requirements FHFA aims to take in the proposed 
rule. Thus, in the proposed rule, the Enterprises would be required to 
impose a floor of 0.5 to any combined multifamily risk multiplier 
calculation. This floor would ensure that combinations of overlapping 
characteristics would not result in potentially dangerous risk 
assessments, which is important since the proposed multipliers 
themselves are designed to represent the average behavior of loans with 
the associated multiplier characteristics.
    Question 15: FHFA is soliciting comments on the proposed framework 
for calculating credit risk capital requirements for multifamily whole 
loans and guarantees, including comments on the loan segments, base

[[Page 33371]]

grids, and risk multipliers. What modifications should FHFA consider 
and why?
    Question 16: FHFA is soliciting comments on the proposed 
multifamily size multiplier and how it is applied to a loan's entire 
balance, rather than marginally to a portion of a loan that exceeds a 
certain size threshold. What modifications to the multifamily size 
multiplier should FHFA consider and why?
    Question 17: FHFA is soliciting comments on the proposed 
multifamily IO multiplier, and how it is applied to full-IO loans with 
no amortization term and IO loans that have seasoned beyond the IO 
period. What modifications to the proposed multifamily IO multiplier 
should FHFA consider and why?
    Question 18: FHFA is soliciting comments on the proposed risk 
multiplier for government-subsidized multifamily whole loans, and how 
the proposed multiplier would be applied to all such multifamily whole 
loans. What modifications to the proposed multiplier for government-
subsidized multifamily whole loans should FHFA consider and why?
Enterprise- and Ginnie Mae-Guaranteed Multifamily Mortgage-Backed 
Securities
    There is no credit risk capital requirement in the proposed rule 
for multifamily MBS held in portfolio that were issued and guaranteed 
by an Enterprise or Ginnie Mae or are collateralized by Enterprise or 
Ginnie Mae multifamily whole loans or securities. Ginnie Mae securities 
are backed by the U.S. government and therefore do not have credit 
risk. For MBS issued by an Enterprise and later purchased by the same 
Enterprise for its portfolio, the credit risk is already reflected in 
the credit risk capital requirement on the underlying multifamily whole 
loans and guarantees (Section II.C.7.a). For MBS held by an Enterprise 
that were issued by the other Enterprise, there is counterparty risk. 
However, these holdings are typically small and, for reasons of 
simplicity, the proposed rule does not include a capital requirement 
for this exposure.
    Question 19: Should multifamily MBS held by an Enterprise that were 
issued by the other Enterprise be subject to a counterparty haircut to 
reflect counterparty risk?
b. Credit Risk Transfer
    This section corresponds to Proposed Rule Sec. Sec.  1240.37 
through 1240.38.
    The Enterprises often seek to reduce the credit risk on their 
multifamily guarantee books of business by transferring and sharing 
risk through multifamily Credit Risk Transfers (CRTs). In the proposed 
rule, the Enterprises would be able to reduce their multifamily credit 
risk capital requirements by engaging in CRTs. In the context of the 
proposed rule, multifamily capital relief would be the reduction in 
required credit risk capital afforded to the Enterprises from 
transferring all or part of a credit risk exposure using a multifamily 
CRT transaction. To calculate capital relief, the proposed rule would 
require the Enterprises to use a formulaic approach that accounts for 
counterparty credit risk on each CRT.
    To date, the Enterprises have generally utilized two broad types of 
CRTs for their multifamily books of business: Loss sharing and 
securitizations. Within these broad types, CRT transactions can have 
unique structures. The proposed approach is general enough to 
accommodate the variable nature of CRTs.
    The first type of multifamily CRT transaction used by the 
Enterprises utilizes a loss sharing structure. In this type of CRT, 
which can be regarded as a front-end risk transfer with a vertical 
tranche, an Enterprise enters into a loss sharing agreement with a 
lender before the lender delivers the loan to the Enterprise. The 
Enterprise and lender share future losses according to a specified 
arrangement, commonly from the first dollar of loss, and in exchange 
the lender is compensated for the risk. For loss sharing CRT 
transactions, the proposed capital relief would be a proportional share 
of the gross credit risk capital requirements implied by the underlying 
multifamily whole loans and guarantees. However, because these 
transactions are not necessarily fully collateralized, loss sharing 
CRTs generally expose the Enterprises to counterparty credit risk. 
Therefore, the proposed rule would reduce capital relief to account for 
counterparty credit risk.
    The second type of multifamily CRT transaction used by the 
Enterprises utilizes a multiclass securitization structure. In this 
type of CRT, an Enterprise sells a pool of loans to a trust that 
securitizes cash flows from the pool into several tranches of bonds. 
The subordinated bonds, also called mezzanine and first-loss bonds, are 
sold to market participants. These subordinated bonds provide credit 
protection for the senior bond, which is the only tranche that is 
credit-guaranteed by the Enterprises. For securitization CRT 
transactions, the proposed rule would require that the Enterprises 
calculate capital relief using a step-by-step approach. To identify 
capital relief, the proposed approach would combine credit risk capital 
and expected losses on the underlying whole loans and guarantees, 
tranche structure, and ownership.
Multifamily Credit Risk Transfer Models
    Under the loss sharing and securitization umbrellas, the 
Enterprises have generally used two distinct models. Fannie Mae's 
multifamily business has relied heavily on its Delegated Underwriting 
and Servicing (DUS) program, a loss sharing CRT program. Freddie Mac's 
multifamily business, in turn, has focused almost exclusively on 
securitizations, predominately through its K-Deal program.
    Under the DUS program, Fannie Mae typically transfers about one-
third of the credit risk per deal under a pari-passu DUS arrangement. 
Fannie Mae retains the remaining two-thirds of the credit risk plus the 
counterparty credit risk associated with the DUS lender business 
relationship. To offset the counterparty credit risk, the program 
requires lenders to post a certain amount of collateral, primarily in 
the form of restricted liquidity, which Fannie Mae can access in the 
event of lender default. The collateral, which for the purposes of 
restricted liquidity is treated uniformly in the proposed rule, 
includes Treasury money market funds, Treasury securities, and 
Enterprise MBS, and is currently marked-to-market on a monthly basis by 
a custodian. Fannie Mae currently has agreements with 25 lenders to 
deliver multifamily loans that meet the criteria specified in the DUS 
underwriting and servicing guidelines.
    Freddie Mac, on the other hand, typically transfers credit risk by 
tranching pools of multifamily loans and selling unguaranteed bonds 
(mezzanine and subordinate) to private market participants. These 
sales, which generally account for 10 to 15 percent of the underlying 
loans, typically result in a transfer of more than 80 percent of the 
credit risk, and often result in a transfer of close to 100 percent of 
the credit risk. Freddie Mac, however, does assume credit and market 
risk during the period between loan acquisition and securitization. In 
addition, after securitization, Freddie Mac retains a portion of the 
credit risk through ownership and/or guarantee of senior K-Deal 
tranches.
    Despite these differences in the Enterprises' multifamily business 
models, the proposed rule accommodates both Enterprises' lending 
practices.

[[Page 33372]]

Proposed Approach for Multifamily CRT Capital Relief
    In general, the proposed approach would require four steps when 
calculating capital relief. In the first step, the Enterprises would 
distribute credit risk capital on the underlying whole loans and 
guarantees to the tranches of the CRT independent of tranche ownership, 
while controlling for expected losses. In practice, the Enterprises 
would allocate credit risk capital such that the riskiest, most junior 
tranches would be allocated capital before the most senior tranches.
    In the second step, the Enterprises would calculate capital relief 
accounting for tranche ownership. The proposed approach would provide 
the Enterprises with capital relief from transferring all or part of a 
credit risk exposure. For each tranche or exposure, the Enterprises 
would identify the portion of the tranche owned by private investors or 
covered by a loss sharing agreement. Then, in general, the Enterprises 
would calculate the capital relief as the product of the credit risk 
capital allocated to the exposure and the portion of the tranche owned 
by private investors or covered by a loss sharing agreement.
    However, this initial calculation of capital relief must be 
adjusted to account for counterparty credit risk because loss sharing 
agreements may be subject to counterparty credit risk. Capital relief 
afforded by credit risk transfers would be overstated absent such an 
adjustment.
    In the third step, for loss sharing agreements, the Enterprises 
would apply haircuts to previously calculated capital relief to adjust 
for counterparty credit risk. In particular, the Enterprises would 
consider the credit worthiness of each counterparty when assessing the 
contribution of loss sharing arrangements such that the capital relief 
is lower for less credit worthy counterparties. At the same time, in 
the proposed approach, collateral posted by a counterparty would be 
considered when determining the counterparty credit risk, as posted 
collateral would at least partially offset the effect of the 
counterparty exposure.
    Lastly, the Enterprises would calculate total capital relief by 
adding up capital relief for each tranche in the CRT.
    The proposed approach would afford relatively higher levels of 
capital relief to the riskier, more junior tranches of a CRT that are 
the first to absorb unexpected losses, and relatively low levels of 
capital relief to the most senior tranches. The approach would also 
afford greater capital relief for transactions that provide coverage: 
(i) On a higher percentage of unexpected losses, (ii) for a longer 
period of time, and (iii) with lower levels of counterparty credit 
risk.
Loss Sharing Approach
    The distinguishing feature of the loss sharing CRT approach is the 
addition of a counterparty. To calculate capital relief under the loss 
sharing approach, the proposed rule would require the Enterprises to 
conduct a counterparty risk analysis in which the Enterprises would 
calculate counterparty exposure as per the loss sharing agreement, 
consider applicable restricted liquidity rules, determine if the 
counterparty has posted collateral, and assess the uncollateralized 
exposure to apply a haircut.
    In the proposed rule, the counterparty haircut would be calculated 
using a modified version of the Basel Advanced IRB approach that takes 
into account the creditworthiness of the counterparty. Echoing the 
single-family discussion from Section II.C.4.a of how counterparty risk 
is amplified due to the correlation between a counterparty's credit 
exposure and the Enterprises' credit exposure (concentration risk), the 
proposed rule would assign larger haircuts to multifamily 
counterparties with higher levels of concentration risk relative to 
diversified counterparties. The Enterprises would assess the level of 
multifamily mortgage risk concentration for each individual 
counterparty to determine whether the counterparty is well diversified 
or whether it has a high concentration risk, and counterparties with a 
lower concentration risk would be assigned a smaller counterparty 
haircut relative to counterparties with higher concentration risk. This 
difference is captured through the asset valuation correlation 
multiplier, AVCM. An AVCM of 1.75 would be assigned to counterparties 
with high concentration risk and an AVCM of 1.25 would be assigned to 
more well-diversified counterparties.
    The proposed approach calculates the haircut by multiplying stress 
loss given default by stress probability of default and by a maturity 
adjustment for the asset. Along with the AVCM, other parameterization 
assumptions in the proposed rule include a stress LGD of 45 percent, a 
maturity adjustment calibrated to 5 years, a stringency level of 99.9 
percent, and expected probabilities of default calculated using 
historical 1-year PD matrix for all financial institutions. The 
multifamily counterparty risk haircut multipliers are presented below 
in Table 29.

     Table 29--Multifamily Counterparty Risk Haircut Multipliers by
                           Concentration Risk
------------------------------------------------------------------------
                                      CP haircut for
                                      concentration      CP haircut for
        Counterparty rating           risk: Not high     concentration
                                           (%)           risk: High (%)
------------------------------------------------------------------------
1.................................                2.1                3.4
2.................................                5.3                8.5
3.................................                6.0                9.6
4.................................               12.7               19.2
5.................................               16.2               22.9
6.................................               22.5               28.5
7.................................               41.2               45.1
8.................................               48.2               48.2
------------------------------------------------------------------------

    The Enterprises would select a counterparty haircut from Table 29 
and would apply the haircut to the uncollateralized exposure in a CRT. 
Further, if in the case of lender failure an Enterprise has contractual 
control of the lender's guarantee fee revenue, then the 
uncollateralized exposure would also be adjusted for lender guarantee 
fee revenue associated with the multifamily loan guarantee fees. In 
this lender loss sharing case, lender revenue would generally reduce 
the Enterprises' required counterparty credit risk capital. In 
particular, under the DUS framework,

[[Page 33373]]

Fannie Mae has contracted with lenders to service the loans while 
retaining control of the servicing rights.
Securitization Approach
    To calculate capital relief under the securitization approach, the 
proposed rule would require the Enterprises to analyze the levels of 
subordination involved in the securitization structure, and identify 
the portion of the tranches owned by private investors or covered by a 
loss sharing agreement. The Enterprises would then apply risk transfer 
calculations that resemble those used for the single-family CRT 
transactions, with minor changes to some of the required parameters.
Other Multifamily CRT Considerations
    The Enterprises may engage in other forms of CRT, which can be 
generally thought of as loss sharing with multiple tranches--vertical, 
horizontal, or both. These types of CRT could include back-end 
reinsurance coverage (e.g., Fannie Mae's CIRT program), through which 
the Enterprises enter into an agreement with a third party (typically a 
lender) to cover first losses on a pool of loans up to a certain 
percentage. In the back-end reinsurance model, the Enterprises, as 
policy holders, typically retain some portion (or all) of the first 
loss on a pool of covered multifamily loans, and compensate the 
reinsurer directly. In this design, the Enterprises bear some 
counterparty credit risk. Accordingly, calculating capital relief for 
reinsurance CRT transactions in the proposed rule would require the 
Enterprises to determine the amount of transferrable capital and stress 
losses, allocate stress losses to each tranche in the deal, determine 
the losses owned by the reinsurers, and adjust the calculated capital 
relief for counterparty credit risk, including any reinsurer haircut or 
posted collateral. Under the top-loss approach, the Enterprises are 
responsible for losses after the counterparty pays the agreed top-loss 
coverage percentage. In this model, the Enterprises also bear 
counterparty risk, which requires an adjustment of the capital relief 
to account for counterparty credit risk.
    In general, the Enterprises would calculate the multifamily CRT 
capital relief as the product of the credit risk capital allocated to 
the exposure and the portion of the tranche owned by private investors 
or covered by a loss sharing agreement. The Enterprise would then 
adjust capital relief for counterparty credit risk, if applicable. The 
proposed approach implies that the CRT provides loss coverage through 
the entire duration of the loans subject to risk transfer. This 
includes the period at which a balloon payment, if the loan involves 
one, is due. If multifamily CRT coverage expires before the underlying 
loans mature, then capital relief afforded by the multifamily CRT may 
be overstated absent such a loss timing adjustment. However, because 
multifamily loans typically include a balloon payment, it is assumed 
that CRT coverage includes all potential losses including those 
associated with the borrower's failure to make the balloon payment.
Seasoned CRT Capital Calculations
    In the proposed rule, the Enterprises would need to recalculate 
post-deal CRT capital on seasoned multifamily CRT transactions.
    Fannie Mae's current risk transfer method (the DUS program) largely 
involves proportional front-end loss-sharing. In the proposed rule, for 
each group of loans that have been acquired through a loss-sharing 
transaction, including Fannie Mae's DUS program, the Enterprises would 
recalculate capital relief to reflect changes in restricted liquidity 
and counterparty exposure.
    The majority of Freddie Mac's current risk transfer method involves 
structured securitizations through the K-deal program. Prepayment 
penalty structures, including defeasance, that prevent unpaid balances 
from changing significantly are often part of multifamily structured 
securitizations. These situations limit the effect of updating and 
recalculating the post-deal CRT capital. Nevertheless, in anticipation 
of future growth in multifamily CRT activities, the proposed rule would 
establish guidelines for post-deal CRT capital reporting.
    In the proposed rule, for each group of loans remaining in a 
securitization CRT transaction, including those in Freddie Mac's K-
deals, the Enterprises would recalculate capital relief by aggregating 
the updated loan-level capital requirements for each pool to determine 
how much capital is effectively transferred through the CRT at the time 
of the update. For each deal, the Enterprises would be required to 
update asset fundamentals that may affect the amount of expected or 
unexpected losses associated with the deal, as well as any potential 
changes in the deal's loan balances as a result of voluntary or 
involuntary terminations, including prepayments within or outside any 
applicable prepayment penalty period. In addition, for each tranche, 
the Enterprises would be required to update which parties are 
responsible for changes in a given tranche's exposure. A deal may 
involve different forms of credit enhancements in addition to the 
typical senior-subordinated structure (e.g., retention, insurance, re-
insurance). This step would require the Enterprises to consider changes 
to risk exposure due to changes in expected or unexpected losses 
associated with the deal and any potential changes in UPB following 
voluntary or involuntary terminations, including prepayments within or 
outside any applicable prepayment penalty period.
    Question 20: FHFA is soliciting comments on the proposed approaches 
for calculating multifamily CRT capital relief. What modifications 
should FHFA consider and why?
    Question 21: Should the proposed multifamily CRT formulae 
differentiate the capital relief allowed in CRT transactions with low 
loan counts from that allowed in CRT transactions with high loan 
counts?
    Question 22: FHFA is soliciting comments on multifamily 
counterparty haircuts. What modifications should FHFA consider and why?
    Question 23: FHFA is soliciting comments on whether CRT loss timing 
should be accounted for in measuring CRT capital relief. What 
modifications should FHFA consider and why?
c. Market Risk
    This section corresponds to Proposed Rule Sec. Sec.  1240.39 
through 1240.40.
Multifamily Whole Loans and Guarantees
    Multifamily whole loans held in the Enterprises' portfolios have 
market risk stemming from changes in value due to movements in interest 
rates and credit spreads. As the Enterprises currently hedge interest 
rate risk closely at the portfolio level, the market risk capital 
requirements in the proposed rule would focus on spread risk.
    The proposed rule would require the Enterprises to calculate market 
risk capital requirements on fixed- and adjustable-rate multifamily 
whole loans using a spread duration approach, which relies, in part, on 
the Enterprises' internal models.
    For the spread duration approach in the proposed rule, the 
Enterprises would calculate market risk capital as the product of a 
spread shock and spread duration. The proposed rule would include a 
specified spread shock and require an Enterprise to use its internal 
models to estimate spread durations.
    Capital results that rely on internal model calculations can be 
opaque and

[[Page 33374]]

result in different capital requirements across Enterprises for the 
same or similar exposures. Hence, the proposed rule would partly rely 
on an Enterprise's internal models only when the market risk complexity 
is sufficiently high that using a single point estimate would 
inadequately represent the exposure's underlying multifamily market 
risk.
    Notably, internal models used in the determination of multifamily 
market risk capital requirements would be subject to ongoing 
supervisory review. As an example, an Enterprise's model risk 
management is subject to FHFA's 2013-07 Advisory Bulletin.
    The market risk capital requirement for the Enterprises' 
multifamily fixed- and adjustable-rate whole loans would be the product 
of a defined credit spread shock (15 bps) and the spread duration, 
calculated individually by the Enterprises using each Enterprise's 
internal models. For a given multifamily whole loan, the product of the 
spread shock and the spread duration would then be multiplied by the 
market value of the asset to compute the market risk capital 
requirement in dollars. The proposed 15 basis point spread duration 
assumes strong historical multifamily market performance, high 
multifamily whole loan liquidity, and low cash flow pricing sensitivity 
to changes in interest rate spreads.
    Question 24: FHFA is soliciting comments on the proposed approach 
for calculating market risk capital requirements for multifamily whole 
loans. What modifications should FHFA consider and why?
Enterprise- and Ginnie Mae- Guaranteed Multifamily Mortgage-Backed 
Securities
    Enterprise- and Ginnie Mae-guaranteed multifamily MBS held in the 
Enterprises' portfolios have market risk stemming from changes in value 
due to movements in interest rates and credit spreads. As discussed in 
Section II.C.6.c with regard to the market risk capital requirements 
for multifamily whole loans, the Enterprises currently hedge interest 
rate risk closely at the portfolio level, and therefore the market risk 
capital requirements in the proposed rule would focus on spread risk.
    In the proposed rule, the market risk capital requirement for 
Enterprise- and Ginnie Mae-guaranteed multifamily MBS would be 
determined using a spread duration approach, which would rely, in part, 
on the Enterprises' internal models. For the spread duration approach 
in the proposed rule, the Enterprises would calculate market risk 
capital as the product of a spread shock and spread duration. The 
proposed rule would include a specific spread shock and require an 
Enterprise to use its internal models to estimate spread durations.
    The use of internal models would allow the Enterprises to more 
frequently update spread durations to reflect market changes. However, 
capital results that rely on internal model calculations can be opaque 
and result in different capital requirements across Enterprises for the 
same or similar exposures. Hence, the proposed rule would partly rely 
on an Enterprise's internal models only when the market risk complexity 
is sufficiently high that using a single point estimate inadequately 
represents the exposure's underlying multifamily market risk.
    Notably, internal models used in the determination of multifamily 
market risk capital requirements would be subject to ongoing 
supervisory review. As an example, an Enterprise's model risk 
management is subject to FHFA's 2013-07 Advisory Bulletin.
    The market risk capital requirement for Enterprise- and Ginnie Mae-
guaranteed multifamily MBS would be the product of a defined credit 
spread shock (100 bps) and the spread duration calculated individually 
by the Enterprises using each Enterprise's internal models. The 
proposed 100 basis point spread shock reflects a combination of the 
Enterprises' estimates, and is driven by the complexity of structured 
products relative to whole loans which could decrease liquidity and 
increase cash flow pricing sensitivity to changes in interest rate 
spreads.
    Question 25: FHFA is soliciting comments on the proposed approach 
for calculating risk-based capital requirements for Enterprise and 
Ginnie Mae multifamily MBS. What modifications should FHFA consider and 
why?
d. Operational Risk
    This section corresponds to Proposed Rule Sec. Sec.  1240.41 
through 1240.42.
    As described in section II.C.2 above, the proposed rule would 
establish an operational risk capital requirement of 8 basis points for 
all assets. For multifamily whole loans and guarantees, and Enterprise 
and Ginnie Mae multifamily MBS, the operational risk capital 
requirement would be 8 basis points of the unpaid principal balance of 
assets with credit risk or 8 bps of the market value of assets with 
market risk.
e. Going-Concern Buffer
    This section corresponds to Proposed Rule Sec. Sec.  1240.43 
through 1240.44.
    As described in section II.C.3 above, the proposed rule would 
establish a going-concern buffer of 75 basis points for all assets. For 
multifamily whole loans and guarantees, and Enterprise and Ginnie Mae 
multifamily MBS, the going-concern buffer would be 75 basis points of 
the unpaid principal balance of assets with credit risk or 75 basis 
points of the market value of assets with market risk.
f. Impact

  Table 30--Fannie Mae and Freddie Mac Combined Estimated Total Risk-Based Capital Requirements for Multifamily
                    Whole Loans, Guarantees, and Related Securities as of September 30, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                Capital requirement
                                                                 -----------------------------------------------
                                                                     $billions          bps          Share (%)
----------------------------------------------------------------------------------------------------------------
Net Credit Risk.................................................           $16.5  ..............  ..............
    Credit Risk Transferred.....................................           (8.0)  ..............  ..............
                                                                 -----------------------------------------------
Post-CRT Net Credit Risk........................................             8.5             171              61
Market Risk.....................................................             1.3              25               9
Going-Concern Buffer............................................             3.7              74              27
Operational Risk................................................             0.4               8               3
                                                                 -----------------------------------------------
        Total Capital Requirement...............................            13.9             278             100
                                                                 -----------------------------------------------

[[Page 33375]]

 
            Total UPB, $billions................................           499.6  ..............  ..............
----------------------------------------------------------------------------------------------------------------


 Table 31--Fannie Mae and Freddie Mac Combined Estimated Credit Risk Capital Requirements for Multifamily Whole
                        Loans and Guarantees as of September 30, 2017--by Loan Category *
----------------------------------------------------------------------------------------------------------------
                                                                      Capital                         Capital
                                                                    requirement         UPB         requirement
                                                                    ($billions)     ($billions)        (bps)
----------------------------------------------------------------------------------------------------------------
New Originations................................................            $1.9             $42             449
Performing Seasoned Loans.......................................            14.6             449             325
Non-Performing Loans............................................             0.0               1             511
                                                                 -----------------------------------------------
    Net Credit Risk.............................................            16.5             492             336
    Credit Risk Transferred.....................................           (8.0)  ..............  ..............
                                                                 -----------------------------------------------
        Post-CRT Net Credit Risk................................             8.5             492             174
----------------------------------------------------------------------------------------------------------------
* Excludes both Enterprises' retained portfolio holdings of MBS guaranteed by the other Enterprise, and Ginnie
  Mae MBS.

7. Commercial Mortgage-Backed Securities
    This section corresponds to Proposed Rule Sec.  1240.46.
Credit Risk and Market Risk
    In the proposed rule, the capital requirement for multifamily 
commercial mortgage-backed securities (CMBS) held by the Enterprises 
that are not guaranteed by an Enterprise or by Ginnie Mae would be a 
single 200 basis point requirement that accounts for both credit and 
market risk. The 200 basis point requirement reflects a combination of 
the Enterprises' internal model estimates. FHFA chose this approach 
based on internal staff analysis and discussions with the Enterprises. 
FHFA believes this simple approach is justified given the small, and 
shrinking, non-Enterprise and non-Ginnie Mae CMBS portfolios held by 
the Enterprises.
Operational Risk
    As described in section II.C.2 above, the proposed would require 
the Enterprises to hold an operational risk capital requirement of 8 
bps for all assets. For multifamily CMBS held by the Enterprises that 
were not issued by the Enterprises or by Ginnie Mae, the operational 
risk capital requirement would be 8 bps of the securities' market 
value.
Going-Concern Buffer
    As described in section II.C.3 above, the proposed rule uses a 
going-concern buffer of 75 bps for all assets. For multifamily CMBS 
held by the Enterprises that were not issued by the Enterprises or by 
Ginnie Mae, the going-concern buffer would be 75 bps of the securities' 
market value.
Impact

Table 32--Fannie Mae and Freddie Mac Combined Estimated Risk-Based Capital Requirements for Commercial Mortgage-
                                   Backed Securities as of September 30, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                Capital requirement
                                                                 -----------------------------------------------
                                                                     $billions          bps          Share (%)
----------------------------------------------------------------------------------------------------------------
Credit Risk and Market Risk.....................................          $0.013             197              71
Going-Concern Buffer............................................           0.005              74              27
Operational Risk................................................           0.001               8               3
                                                                 -----------------------------------------------
    Total Capital Requirement...................................           0.018             279             100
                                                                 -----------------------------------------------
        Total UPB, $billions....................................           0.656  ..............  ..............
----------------------------------------------------------------------------------------------------------------

    Question 26: FHFA is soliciting comments on the proposed approach 
for calculating risk-based capital requirements for CMBS. What 
modifications should FHFA consider and why?
8. Other Assets and Guarantees
    This section corresponds to Proposed Rule Sec.  1240.47.
    This section describes the proposed rule for certain assets and 
guarantees that are not covered by the Enterprises' core business 
activities. This section also describes the proposed rule for new 
products that are not covered in the proposed rule.
    For assets with credit risk exposure, the proposed rule defines 
credit risk capital requirements. The proposed rule allows the 
Enterprises to use internal methodologies to calculate market risk 
capital requirements for other assets and guarantees.

[[Page 33376]]

Deferred Tax Assets
    The proposed rule would establish a risk-based capital requirement 
for deferred tax assets (DTAs) that would offset the DTAs included in 
core capital in a manner generally consistent to the Basel III 
treatment of DTAs. DTAs are recognized based on the expected future tax 
consequences related to existing temporary differences between the 
financial reporting and tax reporting of existing assets and 
liabilities given established tax rates. In general, DTAs are 
considered a component of capital because these assets are capable of 
absorbing and offsetting losses through the reduction to taxes. 
However, DTAs may provide minimal to no loss-absorbing capability 
during a period of stress as recoverability (via taxable income) may 
become uncertain.
    In 2008, during the financial crisis, both Enterprises recognized a 
valuation allowance to reduce their DTAs to amounts that were more 
likely than not to be realized based on the facts that existed at the 
time and estimated future taxable income. A valuation allowance on DTAs 
is typically recognized when all or a portion of DTAs is unlikely to be 
realized considering projections of future taxable income. The 
recognition of the valuation allowances on DTAs resulted in non-cash 
charges to income and reductions to the Enterprises' net DTA balances 
(included in the retained earnings components of capital). Fannie Mae 
established a partial valuation allowance on DTAs of $30.8 billion in 
2008, which was a major contributor to the overall capital reduction of 
$66.5 billion at Fannie Mae in 2008. Similarly, Freddie Mac established 
a partial valuation allowance on DTAs of $22.4 billion in 2008, which 
was also a major contributor to the overall capital reduction of $71.4 
billion at Freddie Mac in 2008.
    Other financial regulators recognize the limited loss absorbing 
capability of DTAs, and therefore limit the amount of DTAs that may be 
included in Common Equity Tier 1 (CET1) capital. Under Basel III 
guidance, certain DTAs are excluded from CET1, while other DTAs are 
included in CET1 capital up to a cap of 10 percent of CET1 capital. 
Most other DTAs are included in risk-weighted assets.
    Given the Enterprises' experiences with DTAs during the financial 
crisis, FHFA would like to limit the amount of DTAs counted as capital, 
similar to the limitations of the other financial regulators. However, 
FHFA does not have the authority to change the statutory definition of 
core capital for the Enterprises. The proposed rule would instead adopt 
a modified version of the Basel III treatment whereby DTA amounts that 
would be deducted from CET1 under Basel are included in the risk-based 
capital requirement. The result of this modification would be to 
neutralize the impact of DTAs on Enterprise capital to the same degree 
that the Basel framework limits the amount of DTAs included in CET1. 
Similarly, DTA amounts included in risk weighted assets under Basel 
would also be included in the risk-based capital requirement. 
Specifically, the risk-based capital requirement for DTAs would be the 
sum of:
    <bullet> 100 percent of DTAs that arise from net operating losses 
and tax credit carryforwards, net of any related valuation allowances 
and net of deferred tax liabilities (DTLs);
    <bullet> 100 percent of DTAs arising from temporary differences 
that could not be realized through net operating loss carrybacks, net 
of related valuation allowances and net of DTLs that exceed 10 percent 
of adjusted core capital; \41\
---------------------------------------------------------------------------

    \41\ Adjusted core capital is core capital, per the statute, 
less DTAs that arise from net operating losses and tax credit 
carryforwards, net of any related valuation allowances and net of 
deferred tax liabilities.
---------------------------------------------------------------------------

    <bullet> 20 percent (8 percent x 250 percent) of DTAs arising from 
temporary differences that could not be realized through net operating 
loss carrybacks, net of related valuation allowances and net of DTLs 
that do not exceed 10 percent of adjusted core capital; and
    <bullet> 8 percent of DTAs arising from temporary differences that 
could be realized through net operating loss carrybacks, net of related 
valuation allowances and net of DTLs.
    The capital requirement for DTAs is highly sensitive to the amount 
of core capital held by an Enterprise. While the Enterprises currently 
have negative core capital, Table 33 below shows the impact of the 
proposed DTA treatment for the third and fourth quarters of 2017, 
assuming the Enterprises held core capital equal to the risk-based 
capital requirement (before DTAs), in order to show the DTA impact on a 
post-conservatorship basis. The fourth quarter impact is significantly 
lower due to the reduction in DTAs because of the Tax Cuts and Jobs Act 
of 2017.

Table 33--Fannie Mae and Freddie Mac Estimated Risk-Based Capital Requirements for Deferred Tax Assets Assuming Core Capital Equal to Risk-Based Capital
                                                                      Requirement *
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              As of September 30, 2017 (in $billions)         As of December 31, 2017 (in $billions)
                                                         -----------------------------------------------------------------------------------------------
                                                            Fannie Mae      Freddie Mac        Total        Fannie Mae      Freddie Mac        Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Category 1..............................................            $2.5            $1.4            $3.9            $2.5  ..............            $2.5
Category 2..............................................            15.3             4.0            19.3             5.6  ..............             6.6
Category 3..............................................             1.9             1.2             3.0             1.8            $0.9             1.8
Category 4..............................................             0.3             0.3             0.5  ..............             0.3             0.3
                                                         -----------------------------------------------------------------------------------------------
    Total Capital Requirement...........................            19.9             6.8            26.8            10.0             1.2            11.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The DTA capital requirement is a function of Core Capital. Both Enterprises have negative Core Capital as of September 30, 2017 and December 31, 2017.
  In order to calculate the DTA capital requirement, we assume Core Capital is equal to the Risk-Based Capital Requirement without consideration of the
  DTA capital requirement.
Category 1: 100 percent of DTAs arising from net operating losses and tax credit carryforwards, net of any related valuation allowances and net of DTLs.
Category 2: 100 percent of DTAs arising from temporary differences that could not be realized through net operating loss carry backs, net of related
  valuation allowances and net of DTLs that exceed 10 percent of adjusted core capital. Adjusted core capital is core capital, per the statute, less
  DTAs that arise from net operating losses and tax credit carryforwards, net of any related valuation allowances and net of deferred tax liabilities.
Category 3: 20 percent of DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, net of related
  valuation allowances and net of DTLs that do not exceed 10 percent of adjusted core capital.
Category 4: 8 percent of DTAs arising from temporary differences that could be realized through net operating loss carrybacks, net of related valuation
  allowances and net of DTLs.


[[Page 33377]]

    Table 34 shows the impact of the proposed DTA treatment with the 
Enterprises' actual negative core capital in the third and fourth 
quarters of 2017.

  Table 34--Fannie Mae and Freddie Mac Estimated Risk-Based Capital Requirements for Deferred Tax Assets Assuming Core Capital as of September 30, 2017
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              As of September 30, 2017 (in $billions)         As of December 31, 2017 (in $billions)
                                                         -----------------------------------------------------------------------------------------------
                                                            Fannie Mae      Freddie Mac        Total        Fannie Mae      Freddie Mac        Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Category 1..............................................            $2.5            $1.4            $3.9            $2.5  ..............            $2.5
Category 2..............................................            24.5             9.8            34.3            14.8            $4.7            19.6
Category 3..............................................  ..............  ..............  ..............  ..............  ..............  ..............
Category 4..............................................             0.3             0.3             0.5  ..............             0.3             0.3
                                                         -----------------------------------------------------------------------------------------------
    Total Capital Requirement...........................            27.3            11.5            38.8            17.4             5.0            22.4
--------------------------------------------------------------------------------------------------------------------------------------------------------

Municipal Debt
    Municipal debt is debt securities issued by states, local 
governments, or state agencies such as state housing finance agencies. 
As municipal debt generally has minimal default risk, the proposed rule 
would assign a zero credit risk capital requirement to municipal debt. 
The proposed rule would assign a market risk capital requirement of 760 
bps, an operational risk capital requirement of 8 bps, and a going-
concern buffer of 75 bps to municipal debt. The 760 basis point market 
risk capital requirement reflects a combination of the Enterprises' 
internal model estimates.
    The proposed rule would use the single point estimate approach to 
market risk for a number of reasons. Municipal debt is a shrinking 
component of the Enterprises' portfolios. A more complicated approach 
would not be warranted, as it would not result in a material change to 
the Enterprises' overall capital position. Municipal debt has a simple 
market risk profile due to the absence of a prepayment option. 
Additionally, the credit spread for municipal debt is stable across 
maturities. The single point estimate for market risk capital 
represents the average of estimates from the Enterprises.
Reverse Mortgages and Reverse Mortgage Securities
    The proposed rule would not subject reverse mortgages and 
securities backed by reverse mortgages to a credit risk capital 
requirement due to Federal Housing Administration insurance on the 
mortgages. The proposed rule would assign a market risk capital 
requirement of 500 bps to reverse mortgages and 410 bps to reverse 
mortgage securities, an operational risk capital requirement of 8 bps 
to reverse mortgages and reverse mortgage securities, and a going-
concern buffer of 75 bps to reverse mortgages and reverse mortgage 
securities. The 500 and 410 basis point market risk capital 
requirements reflect Fannie Mae's internal model estimates since 
Freddie Mac did not own reverse mortgages.
    The rationale for applying the single point estimate approach to 
market risk for reverse mortgages and reverse mortgage securities is 
that (i) these assets are a shrinking component of the Enterprises' 
portfolios and (ii) these assets have low and stable market risk 
resulting from low prepayment sensitivity. In particular, for reverse 
mortgages, refinance is rare and not driven by changes in interest 
rates. As a result, market value on reverse mortgages and reverse 
mortgage securities is relatively insensitive to prepayment.
Cash and Cash Equivalents
    Cash and cash equivalents are highly liquid investment securities 
that have a maturity at the date of acquisition of three months or less 
and are readily convertible to known amounts of cash. The proposed rule 
would assign a zero credit risk capital requirement and a zero market 
risk capital requirement to cash and cash equivalents as they are not 
subject to default and market risks. Further, cash and cash equivalents 
would receive a zero operational risk capital requirement and a zero 
going-concern buffer.
Single-Family Rentals
    The proposed rule would include a credit risk capital requirement 
for single-family rentals. Single-family rentals are multiple income-
producing single-family units owned by an investor for the purpose of 
renting them and deriving a profit from their operation. The concept of 
single-family rentals has been traditionally associated with 
individual-investor single-family units, which are usually covered 
under the single-family framework and include either single or two-to-
four unit assets. However, the single-family rental market also 
includes investors that own portfolios of more than ten units, and 
sometimes up to thousands of units across different cities. The 
Enterprises have explored and have already executed deals on this type 
of assets.
    Although this type of multi-unit ownership cannot be defined as a 
typical multifamily investment, the income-producing nature would allow 
the Enterprises to evaluate them as a traditional multifamily 
investment for the purpose of estimating capital. To do so would 
require the Enterprises to calculate a DSCR and LTV on the portfolio of 
single-family rentals, which is a relatively simple calculation once 
income and values for every property are available. The proposed rule 
would require the Enterprises to calculate DSCR and LTV in this manner 
for this type of single-family rental deals, and to subsequently 
calculate base credit risk capital requirements using the appropriate 
multifamily FRM or ARM base credit risk capital grid.
Impact

[[Page 33378]]



 Table 35--Fannie Mae and Freddie Mac Combined Estimated Risk-Based Capital Requirements for Other Assets as of
                                               September 30, 2017
----------------------------------------------------------------------------------------------------------------
                                                                                Capital requirement
                                                                 -----------------------------------------------
                                                                     $billions          bps          Share (%)
----------------------------------------------------------------------------------------------------------------
Credit Risk.....................................................            $2.1              64               6
Market Risk.....................................................             2.9              88               9
Going-Concern Buffer............................................             1.2              36               4
Operational Risk................................................             0.1               4               0
Other (DTA).....................................................            26.8             811              81
                                                                 -----------------------------------------------
    Total Capital Requirement...................................            33.1           1,002             100
                                                                 -----------------------------------------------
        Total UPB, $billions....................................           330.0  ..............  ..............
----------------------------------------------------------------------------------------------------------------

    Question 27: FHFA is soliciting comments on the proposed approaches 
for calculating risk-based capital requirements for other assets and 
guarantees. What modifications should FHFA consider and why?
9. Unassigned Activities
    This section corresponds to Proposed Rule Sec.  1240.48.
    Given the continuing evolution and innovation in the financial 
markets, FHFA recognizes that the Enterprises could continue to develop 
and purchase new products and engage in other new activities.
    The proposed rule would require an Enterprise to provide written 
notice of an Unassigned Activity, which includes any asset, guarantee, 
off-balance sheet guarantee, or activity for which the proposed rule 
does not have an explicit risk-based capital treatment. An Enterprise 
must provide a proposed capital treatment along with sufficient 
information about the Unassigned Activity for FHFA to understand the 
risks and benefits of the activity. The proposed rule would require 
FHFA to analyze the Unassigned Activity and to provide the Enterprise 
with written notice of the appropriate capital treatment. If FHFA does 
not provide the Enterprise with written notice of a treatment in time 
for the Enterprise to prepare its quarterly capital report, the 
proposed rule would require an Enterprise to use its proposed capital 
treatment to determine an interim capital requirement. FHFA will 
monitor the Enterprises' activities and when appropriate propose 
amendments to this regulation addressing the treatment of activities 
that do not have an explicit risk-based capital treatment.
    Given the dynamics of the marketplace and the Enterprises' 
business, it is not possible to construct a regulation that specifies a 
detailed treatment for every new type of instrument or capture every 
new type of risk that might emerge from quarter to quarter. It will not 
always be possible for FHFA to analyze and determine an appropriate 
treatment for a new asset or activity in time for an Enterprise to file 
its capital report, either due to the timing of the notice from the 
Enterprise or due to the complexity of the new product or activity. The 
proposed rule strikes a balance between accuracy and timeliness by 
requiring FHFA to determine the appropriate long-term treatment of an 
Unassigned Activity, while allowing the Enterprises to use their 
internal models on an interim basis.

D. Minimum Leverage Capital Requirements

    This section corresponds to Proposed Rule Sec.  1240.50.
Overview
    The proposed rule includes two alternative minimum leverage capital 
requirement proposals for public comment. Under the first approach, the 
Enterprises would be required to hold capital equal to 2.5 percent of 
total assets (as determined in accordance with GAAP) and off-balance 
sheet guarantees related to securitization activities, regardless of 
the risk characteristics of the assets and guarantees or how they are 
held on the Enterprises' balance sheets (the ``2.5 percent 
alternative''). Under the second approach, the Enterprises would be 
required to hold capital equal to 1.5 percent of trust assets and 4 
percent of non-trust assets (the ``bifurcated alternative''), where 
trust assets are defined as Fannie Mae mortgage-backed securities or 
Freddie Mac participation certificates held by third parties and off-
balance sheet guarantees related to securitization activities, and non-
trust assets are defined as total assets as determined in accordance 
with GAAP plus off-balance sheet guarantees related to securitization 
activities minus trust assets. The Enterprises' retained portfolios 
would be included in non-trust assets.
    The considerations for the two alternative approaches to the 
minimum leverage capital requirement in the proposed rule are discussed 
below, followed by a more detailed discussion of each alternative. FHFA 
seeks feedback from commenters on both alternatives to the minimum 
leverage capital requirement.
Considerations for Establishing an Updated Minimum Leverage Capital 
Requirement
    Establishing an updated minimum leverage capital requirement is an 
important component of the proposed regulatory capital requirements for 
the Enterprises. While FHFA believes that the proposed risk-based 
capital requirements included in this rulemaking reflect a detailed and 
robust assessment of risk to Fannie Mae and Freddie Mac, FHFA also 
believes that it is appropriate and prudent to establish a backstop to 
guard against the potential that the risk-based requirements 
underestimate the risk of an Enterprises' assets. The Safety and 
Soundness Act authorizes FHFA to set a higher leverage ratio than the 
minimum required by the statute, and this proposed rule, under either 
of the proposed alternatives, would do so.
    In considering both the need for and the structure of an updated 
minimum leverage capital requirement, FHFA has taken into consideration 
how to best set the minimum leverage requirement as a backstop to the 
proposed risk-based capital framework. These considerations include the 
model risk associated with any risk-based measure, the pro-cyclicality 
of using mark-to-market LTV ratios in the proposed risk-based capital 
requirement, the funding risks of the Enterprises' business, and the 
impact of having a leverage ratio serve as the

[[Page 33379]]

binding capital constraint. Each of these considerations is discussed 
below.
    First, because risk-based capital requirements are subject to a 
number of assumptions and can change over time, a minimum leverage 
requirement can serve as a backstop in the event that risk-based 
requirements become too low. As discussed earlier, risk-based capital 
frameworks depend on models and, thus, are subject to the risk that the 
applicable model will underestimate or fail to address a developing 
risk. In particular, new activities, given their lack of historical 
performance data, are subject to significant uncertainty. As a result, 
any models that assess new activities may under-predict risk.
    Second, a leverage requirement can serve as a backstop because the 
proposed risk-based capital requirements are pro-cyclical, while a 
leverage requirement is risk-invariant. Because the proposed risk-based 
requirements use mark-to-market LTVs for loans held or guaranteed by 
the Enterprises in determining capital requirements, as home prices 
appreciate and LTVs consequently fall, the Enterprises would be allowed 
to release capital. In this context, a minimum leverage capital 
requirement could mitigate the amount of capital released as risk-based 
capital levels fell below the applicable leverage requirement. The 
housing market can be highly cyclical and downturns are often preceded 
by rapid and unsustainable home price appreciation, resulting in the 
potential for the Enterprises to release capital ahead of a downturn 
when their access to the capital markets may be constrained.
    In addition to the two minimum capital requirement alternatives 
included in this proposed rule, FHFA also has the authority to 
temporarily increase the Enterprises' leverage requirements through 
order or regulation to address pro-cyclical or other concerns about the 
Enterprises' capital levels. It is also important to note that, 
separate from the leverage requirement proposals discussed in this 
section, FHFA's authority to address pro-cyclicality concerns also 
includes tools on the risk-based capital requirements proposed in this 
rule. Specifically, as is discussed in section II.F, FHFA could make 
upward adjustments by regulation or order to the risk-based capital 
requirements under the provisions of the Safety and Soundness Act to 
take into account changing economic conditions, such as rising house 
prices and asset levels, and to adjust the risk-based capital 
requirements for specified products or activities.
    Third, ensuring a sufficient minimum leverage capital requirement 
could also address the funding risks of the Enterprises' business 
activities. Both in the single-family and multifamily mortgage-backed 
security guarantee business lines, investors provide the Enterprises a 
stable source of funding that is match-funded with the mortgage assets 
that Fannie Mae and Freddie Mac purchase and hold in trust accounts. 
While these mortgage assets are reflected on the balance sheets of the 
Enterprises and represent the vast majority of their assets, the 
funding for these assets has already been provided and cannot be 
withdrawn during times of market stress.
    As discussed previously, this stable funding for trust assets is in 
contrast to the banking deposits and short-term debt that banks rely 
on, which could become unavailable during a stress event and force a 
rapid and disorderly sale of assets into a declining market. While the 
securitization process does not transfer credit risk from the 
Enterprises, Fannie Mae and Freddie Mac also currently engage in 
significant credit risk transfer transactions that transfer a 
substantial portion of credit risk to private investors. As a result of 
both their securitization funding and credit risk transfer practices, 
the risk profile of Enterprise assets held in trusts differs markedly 
from mortgage assets held by depository institutions.
    In contrast, however, the Enterprises' retained portfolio assets do 
pose funding risk to Fannie Mae and Freddie Mac. These retained 
portfolio assets must be funded in much the same way that bank assets 
are generally funded, through the issuance of debt. During 
conservatorship, Enterprise retained portfolio asset levels have 
declined considerably since the financial crisis, and the majority of 
the Enterprises' recent portfolio asset purchases support their core 
credit guarantee business, in particular the purchase of mortgages via 
their respective cash windows for aggregation purposes and the 
repurchase of mortgages out of securitizations for purposes of loss 
mitigation. The amount of Enterprise legacy assets held for investment 
has been reduced significantly during conservatorship. The reduction of 
the Enterprises' retained portfolios is required by limits imposed by 
the PSPAs and also furthers the conservatorship objectives of reforming 
the Enterprises' business models and reducing their volume of non-
credit-guarantee-related investments and illiquid assets.
    Fourth, in setting the minimum leverage capital requirement as a 
backstop capital measure, FHFA is also considering the potential 
adverse impact of having the leverage requirement exceed the risk-based 
requirement and become the binding capital constraint for the 
Enterprises. Because a leverage requirement is designed to be risk-
insensitive, a binding leverage requirement could influence Enterprise 
decision-making in ways that encourage risk-taking. For instance, 
during periods of rising home prices, leverage requirements could 
exceed risk-based capital requirements and this could reduce an 
Enterprise's economic incentive to differentiate among the relative 
riskiness of different mortgages. A binding leverage requirement could 
also reduce an Enterprise's incentive to enter into credit risk 
transfer transactions.
    The two alternatives included in this proposed rule offer different 
methodologies for establishing the Enterprises' minimum leverage 
capital requirement, and these methodologies reflect different 
considerations and trade-offs in weighing the factors discussed above. 
FHFA requests feedback on how best to balance the benefits of a 
leverage requirement that would serve as a backstop to the proposed 
risk-based capital requirements and therefore mitigate the risk that 
risk-based requirements would be insufficient, with the downsides of a 
leverage requirement that could influence how the Enterprises evaluate 
risk.
Asset Base
    In the proposed rule, each minimum leverage capital alternative 
would be applied to total assets as determined in accordance with GAAP 
and off-balance sheet guarantees related to securitization activities. 
This would differ from the approach used by commercial banks that are 
subject to multiple leverage ratio requirements, some of which exclude 
off-balance sheet items from the asset base. For both the 2.5 percent 
alternative and the bifurcated alternative, FHFA believes it is 
appropriate, and generally consistent with the Safety and Soundness 
Act's capital requirements and the Supplementary Leverage Ratio for 
banks, to include off-balance sheet guarantees as part of the minimum 
leverage capital requirement to ensure that these risks are 
capitalized.
    Consistent with the treatment in bank capital regulations and the 
Safety and Soundness Act, FHFA includes cash and cash equivalents in 
the asset base for both the 2.5 percent alternative and the bifurcated 
alternative for the minimum leverage capital requirement.

[[Page 33380]]

Under the bifurcated alternative, cash and cash equivalents would be 
treated as a non-trust asset and receive a 4 percent leverage 
requirement. Cash and cash equivalents are highly liquid investment 
securities that have a maturity at the date of acquisition of three 
months or less and are readily convertible to known amounts of cash. 
However, cash and cash equivalents remain subject to funding risk in 
much the same way as other Enterprise portfolio assets. While 
securitized mortgage assets benefit from matched funding in the 
Enterprises' single-family and multifamily business lines, funding for 
short-term, even highly liquid, assets, must be separately obtained. 
Therefore, FHFA is proposing to include cash and cash equivalents in 
the asset base for the minimum leverage capital requirement under both 
of the alternatives included in this proposed rulemaking.
The 2.5 Percent Minimum Leverage Capital Requirement Alternative
    FHFA's first proposed alternative for a minimum leverage capital 
requirement would establish a single leverage requirement of 2.5 
percent of total assets (as determined in accordance with GAAP) and 
off-balance sheet guarantees related to securitization activities, 
which is referred to here as the 2.5 percent alternative. This compares 
to the current minimum leverage capital requirement, set by statute, of 
2.5 percent of retained portfolio assets, 0.45 percent of mortgage-
backed securities outstanding to third parties, and 0.45 percent of 
other off-balance sheet obligations.
    The 2.5 percent alternative would set the proposed threshold based 
on a number of analyses that are designed to supplement the total 
proposed risk-based capital framework in identifying the minimum 
capital that would be required to fund all of an Enterprise's assets 
through economic and credit cycles, and therefore minimize the 
probability that the Enterprises would again require public support. 
The proposed risk-based capital requirements are pro-cyclical in that 
the capital requirements decrease in favorable economic scenarios and 
increase in stress economic scenarios. In the absence of a credible 
minimum leverage capital requirement, an Enterprise could release or 
redeploy capital during favorable economic periods when the risk-based 
capital requirements are low, and could be unable to raise sufficient 
capital to meet increasing risk-based capital requirements in a 
subsequent stress scenario. In the 2.5 percent alternative, FHFA is 
proposing a minimum leverage capital requirement that would provide a 
substantial, risk-insensitive backstop to the total proposed risk-based 
capital requirements, including credit risk, market risk, operational 
risk, and the going-concern buffer.
Impact of the 2.5 Percent Minimum Leverage Capital Requirement 
Alternative
    If the proposed 2.5 percent alternative had been in place at the 
end of the third quarter of 2017, the combined minimum leverage capital 
requirement would have been $139.5 billion for the Enterprises. Fannie 
Mae's requirement would have been $83.8 billion based on total ending 
assets and guarantees of $3.4 trillion, and Freddie Mac's requirement 
would have been $55.6 billion based on total ending assets and 
guarantees of $2.2 trillion. Similarly, if the proposed risk-based 
capital requirements had been in place, Fannie Mae's risk-based capital 
requirement would have been $115 billion or 3.4 percent, including the 
going-concern buffer of 75 bps. Similarly, Freddie Mac's risk-based 
capital requirement would have been $66 billion or 3.0 percent, 
including the going-concern buffer of 75 bps. Therefore, in considering 
the proposed risk-based capital requirements, the 2.5 percent minimum 
leverage capital requirement alternative would represent a backstop to 
the Enterprises' total proposed risk-based capital requirement 
including a going-concern buffer.
    If the capital requirements in the proposed rule were implemented 
today, both Enterprises' risk-based capital requirements would, by 
significant margins, be the binding constraint regardless of which 
proposed leverage requirement alternative was in place. However, should 
home prices continue to increase and benign unemployment trends 
continue, as has occurred over the past several years, and should the 
credit quality of the Enterprises' new acquisitions continue to remain 
at historically high levels, FHFA expects that the 2.5 percent 
alternative would become the binding capital constraint for one or both 
Enterprises in 2018 or 2019.
Methodology for Developing the 2.5 Percent Minimum Leverage Capital 
Requirement Alternative
    FHFA conducted five analyses that together support a risk-invariant 
minimum leverage capital requirement of 2.5 percent:
    1. Adjusting the 4 percent bank leverage ratio for the relative 
risk of the Enterprises' business;
    2. Determining the capital threshold for bank downgrades and 
adjusting the threshold for the relative risk of the Enterprises' 
business;
    3. Determining the capital threshold for bank failures and 
adjusting the threshold for the relative risk of the Enterprises' 
business;
    4. Analyzing the lifetime credit losses on the Enterprises' 
December 2007 books of business, with adjustments for loans the 
Enterprises no longer acquire and for credit risk transfers; and
    5. Analyzing the CCF risk-based capital requirement on the 
Enterprises' September 2017 books of business, with adjustments for 
loans the Enterprises no longer acquire and for credit risk transfers.

These analyses produced estimates for the minimum leverage capital 
requirement in the 2.2 to 2.8 percent range, and FHFA selected 2.5 
percent as the midpoint of the estimates for this proposed leverage 
requirement alternative. The five analyses are described below.
Adjusting the 4 Percent Bank Leverage Ratio
    In the first analysis, FHFA considered the requirements in place 
for commercial banks. Specifically, FHFA adjusted the commercial bank 
leverage ratio requirement to recognize the lower risk of the 
Enterprises' assets compared to risk of the average bank's assets, 
where risk is defined using Basel risk weights. This adjustment 
recognizes the Enterprises' concentration in residential mortgage 
assets, which under the Basel Accords are assigned a 50 percent risk 
weight.
    Under the U.S. implementation of Basel III, U.S. financial 
regulators require that banks maintain a Tier 1 leverage ratio of 4 
percent to be considered adequately capitalized. FHFA adjusted this 
ratio to take into account the Enterprises' lower risk-weighted asset 
density (risk-weighted assets divided by total assets) relative to the 
risk-weighted asset density of commercial banks.
    Most of the Enterprises' assets are conforming residential 
mortgages, which have a 50 percent risk weight in the Basel 
standardized approach. In contrast, FHFA found that for the 34 bank 
holding companies subject to CCAR in 2017, the banks' assets had higher 
risk weights on average than the Enterprises' assets. FHFA calculated 
the average risk-weighted density as of the fourth quarter of 2016 for 
the 34 bank holding companies subject to CCAR. The analysis yielded an 
estimated overall risk-weighted asset density of 72 percent for the 
banks compared to 50

[[Page 33381]]

percent for the Enterprises. This suggests that the risk weighted asset 
density for the Enterprises' assets is about 69 percent (calculated as 
50 percent divided by 72 percent) of the risk weighted asset density 
for the largest bank holding companies. Through this approach, FHFA 
estimated a minimum leverage capital requirement for the Enterprises of 
2.8 percent (69 percent multiplied by 4 percent).
Determining the Capital Threshold for Bank Downgrades
    In the second analysis, FHFA estimated a minimum leverage capital 
requirement from empirical analyses of bank credit rating downgrades. 
The Agency reviewed capital levels for banks that experienced 
downgrades in credit ratings. FHFA found that the number of credit 
rating downgrades declined markedly for banks with Tier 1 common equity 
capital levels in excess of 5.5 percent of risk-weighted assets. The 
credit downgrades reflected a lack of market confidence that the banks 
could survive as going concerns, despite the banks still having 
positive levels of capital.
    The bank credit rating downgrade analysis was based on 72 banks 
that had both ratings from Standard & Poor's and total assets over $5 
billion during a ten-year study period. The Agency found that banks 
with a risk-based capital ratio below 5.5 percent had a notable 
increase in the occurrence of a two-notch or three-or-more-notch rating 
downgrade within 4 quarters. For example, 53.0 percent of the banks 
with less than 4 percent risk-based capital experienced a two-notch 
credit rating downgrade and 37.0 percent experienced a three-or-more-
notch downgrade. High rates of credit rating downgrades were also 
observed for banks with risk-based capital ratios between 4.0 percent 
and 5.5 percent.\42\ Banks with at least 5.5 percent risk-based capital 
performed substantially better, and had a two-notch downgrade rate of 
between 7.0 percent and 19.0 percent depending on the risk-based 
capital ratio group (e.g., 5.5 percent-6.0 percent, 6.0-6.5 percent, 
etc.), and a three-or-more-notch downgrade rate of between 4.0 percent 
to 10.0 percent depending on the risk-based capital group.
---------------------------------------------------------------------------

    \42\ The two- and three-or-more-notch downgrade rates were 45%/
40% for 4-4.5% capital, 50%/39% for 4.5%-5% capital, and 37%/27% for 
5-5.5% capital.
---------------------------------------------------------------------------

    It was clear from the analysis of credit rating downgrades that 
considerably better outcomes for depository institutions were 
associated with a risk-based capital ratio above 5.5 percent. A 50 
percent average risk weight for Enterprise assets as applied in the 
previous analysis of bank leverage ratios corresponds to a minimum 
leverage capital requirement of 2.8 percent for the Enterprises.
Determining the Capital Threshold for Bank Failures
    In the third analysis, FHFA estimated a minimum leverage capital 
requirement from empirical analyses of bank failures in a manner 
similar to the analysis for credit rating downgrades. The Agency 
reviewed capital levels for banks that experienced failures. FHFA found 
that the number of bank failures declined markedly for banks with Tier 
1 common equity capital levels in excess of 5.5 percent of risk-
weighted assets.
    FHFA's bank failure analysis was based on 122 bank holding 
companies with assets of over $5 billion each. The Agency reviewed Tier 
1 common equity capital ratios for each bank across a nearly 9-year 
study period (between the fourth quarter of 2004 and the first quarter 
of 2013). Banks with a risk-based capital ratio below 5.5 percent at 
the end of any quarter during the study period showed a marked increase 
in the rate of failure or government takeover. Almost half of the banks 
with a risk-based capital ratio below 4.0 percent failed. Less severe, 
but still high rates of failure were observed for banks with risk-based 
capital ratios between 4.0 percent and 5.5 percent.\43\ Banks with at 
least 5.5 percent risk-based capital over the time horizon performed 
much better with a failure rate below 5.0 percent.
---------------------------------------------------------------------------

    \43\ The failure or takeover rate was 25% for 4-4.5% capital, 
40% for 4.5%-5% capital, and 13% for 5-5.5% capital.
---------------------------------------------------------------------------

    Similar to the analysis of credit rating downgrades, FHFA found 
that considerably better outcomes in the bank failure data were 
associated with a risk-based capital ratio above 5.5 percent. A 50 
percent average risk weight for Enterprise assets as applied in the 
previous analysis of bank leverage ratios corresponds to a minimum 
leverage capital requirement of 2.8 percent for the Enterprises.
Analyzing the Lifetime Credit Losses on the Enterprises' December 2007 
Books of Business
    In the fourth analysis, and as discussed above in section II.B, 
FHFA estimated the Enterprises' lifetime credit losses for the December 
31, 2007 book of business, excluding loans that the Enterprises would 
no longer acquire according to their current acquisition criteria. FHFA 
also adjusted (i.e., reduced) the Enterprises' lifetime credit losses 
for the December 31, 2007 book of business to account for current 
business practices of credit risk transfer. To calculate an Enterprise 
leverage ratio, FHFA added estimated requirements for market risk, 
operational risk, and a going-concern buffer to the adjusted lifetime 
losses on the December 31, 2007 book. Based on this approach, FHFA 
estimated a minimum leverage capital requirement for the Enterprises of 
2.2 percent consisting of adjusted lifetime credit losses of 1.2 
percent, market risk capital requirements of 0.2 percent, operational 
risk capital requirements of 0.08 percent, and a going-concern buffer 
of 0.75 percent.
Analyzing the Risk-Based Capital Requirements on the Enterprises' June 
2017 Books of Business
    In the fifth and final analysis, and in order to establish a point 
of comparison using recent data, FHFA calculated risk-based capital 
requirements per the proposed rule for all loans held or guaranteed by 
the Enterprises as of June 30, 2017, excluding assets that the 
Enterprises no longer acquire. The level of the Enterprises' aggregate 
risk-based capital requirements as of June 30, 2017 provides a point-
in-time benchmark for a minimum, non-risk-based capital backstop to the 
proposed risk-based capital requirements because of the recent long 
stretch of favorable economic conditions and several years of the 
Enterprises acquiring predominately high-credit quality loans. 
Specifically, as presented below in Figure 2, the FHFA U.S. Purchase-
Only House Price Index reached an all-time high in the second quarter 
of 2017, the U.S. unemployment rate of 4.3% as of May 2017 was at its 
lowest level in 16 years, and as of June 2017, the average credit 
scores of the Enterprises' guarantee books of business were at all-time 
highs (approximately 745), and the average loan-to-value ratios (60 
percent) were nearing lows last seen in 2006. The risk-based capital 
requirements as of June 30, 2017 could represent close to a cyclical 
low point for the proposed risk-based capital requirements, and would 
therefore be nearing the point at which a non-risk-based leverage 
requirement would provide a useful backstop to the risk-based 
requirements.

[[Page 33382]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.014

    The analysis described above resulted in risk-based capital 
requirements net of CRT and excluding loans the Enterprises no longer 
acquire of $61 billion for Fannie Mae, or 2.3 percent of UPB, and $39 
billion for Freddie Mac, or 2.4 percent of UPB.
    The estimates derived from the Enterprises' 2007 results, 2017 
data, current acquisition criteria, and the proposed risk-based capital 
requirements complement the prior bank-based estimates and further 
suggest a minimum capital leverage requirement for the Enterprises in 
the range of 2 percent to 3 percent. FHFA considered factors that would 
indicate an appropriate requirement more towards either side of the 
range. Selecting a lower requirement would recognize that the 
Enterprises have largely passed market risk onto mortgage-backed 
security investors, while the banks continue to hold large amounts of 
whole loans on their balance sheet. A lower requirement would also 
recognize that the Enterprises have more stable funding sources than 
banking deposits, which are callable. Selecting a higher requirement 
would recognize that the Enterprises pose a greater level of systemic 
risk than many of the banks. The Enterprises have an asset base that is 
less diversified than the banks, which can increase loss severity 
during periods of stress. After considering the relevant factors, FHFA 
selected the 2.5 percent mid-point of the range for this proposed 
minimum leverage capital requirement alternative, which aligns with the 
estimates derived from the analyses previously cited in this 
subsection.
The 2.5 Percent Minimum Leverage Capital Requirement Alternative
    As illustrated in Table 1 and Table 3, the statutory minimum 
capital requirement for the Enterprises was far too low during the 
recent financial crisis. In proposing the 2.5 percent alternative, FHFA 
considered the need for a leverage requirement to serve as a backstop 
to risk-based capital requirements, such as those in this proposed 
rulemaking, that would provide the Enterprises with sufficient capital 
to continue to operate effectively through all economic and credit 
cycles while simultaneously providing protection against the model risk 
inherent in risk-based capital standards, including the possibility 
that capital relief allocated to the Enterprises' risk transfer 
mechanisms is overestimated.
    While model risk broadly covers errors and omissions in the design 
and implementation of models, one common manifestation of model risk is 
the high level of uncertainty around the performance of new products in 
a stress event given the lack of historical performance data on new 
products. This was made evident in the recent financial crisis when the 
risk-based capital rule then in place for the Enterprises did not 
adequately identify the risk in the Enterprises' assets, reinforcing 
the need for a leverage ratio to serve as a backstop for total risk-
based capital requirements.
    In addition, there are also non-economic risks that are typically 
not captured in a risk-based capital framework. For example, there is a 
mismatch with risk-based capital being

[[Page 33383]]

measured on an economic basis, while available capital is measured on 
an accounting basis. Changes in accounting standards, regulatory 
standards, or tax law can cause accounting losses, which deplete 
available capital, potentially contributing to insolvency. The proposed 
risk-based capital requirements, which are based on estimates of 
unexpected economic losses, make no provision for non-economic losses.
    While an excessively high minimum leverage capital requirement 
could have adverse consequences on the Enterprises' economic incentives 
to conduct certain business transactions, the absence of a credible 
minimum leverage capital requirement could lead an Enterprise to 
release or redeploy capital during favorable economic periods when the 
risk-based capital requirements are low and could result in the 
Enterprise being unable to raise sufficient capital to meet increasing 
risk-based capital requirements in a subsequent stress scenario. The 
economic environment in which this rule is being proposed could 
indicate the approach of such an economic scenario, and could indicate 
a cyclical low in risk-based capital requirements in light of the large 
increase in home prices in recent years and the steep drop in national 
unemployment, combined with the historically high credit quality of 
recent Enterprise acquisitions. The 2.5 percent alternative could avoid 
a situation in which declining Enterprise capital levels affect their 
ability to raise capital and provide the market with a certain level of 
stability. This alternative would indicate a plan to maintain capital 
and demonstrate a commitment to safety and soundness, and present a 
market-facing statement of a significant baseline level of capital in 
good or bad market conditions.
The Bifurcated Minimum Leverage Capital Requirement Alternative
    The second minimum leverage capital requirement alternative 
included in this proposed rule, the bifurcated alternative, would 
establish different minimum leverage capital requirements for different 
Enterprise business segments, which would be applied to total assets 
(as determined in accordance with GAAP) and off-balance sheet 
guarantees related to securitization activities. Specifically, under 
the bifurcated alternative, the Enterprises would be required to hold 4 
percent capital for non-trust assets and 1.5 percent capital for trust 
assets. This compares to the current minimum leverage capital 
requirement, set by statute, of 2.5 percent of retained portfolio 
assets, 0.45 percent of mortgage-backed securities outstanding to third 
parties, and 0.45 percent of other off-balance sheet obligations.
    The bifurcated alternative proposes a minimum leverage capital 
requirement that would differentiate between the greater funding risks 
of the Enterprises' non-trust assets and the minimal funding risks of 
the Enterprises' trust assets, while also providing a backstop that is 
anchored to the proposed risk-based capital framework itself. The 
proposed approach of a minimum leverage capital requirement equal to 
1.5 percent of trust assets would identify the risk-based capital 
requirements as the ``primary'' capital measure for the Enterprises 
because it was derived using empirical losses experienced during the 
recent financial crisis and reflects a refined approach to risk. This 
approach would result in a combined minimum leverage capital 
requirement that would more frequently fall below the risk-based 
capital requirements than the 2.5 percent alternative. As a result, as 
discussed below, the bifurcated alternative would be less likely to 
produce a binding leverage requirement that could negatively impact an 
Enterprises' marginal economic decision-making.
    For the Enterprises' non-trust assets, the 4 percent requirement 
would be comparable to the 4 percent leverage requirement for 
commercial banks, because these assets face similar stability concerns 
that motivated the Basel Committee to adopt a leverage ratio on top of 
the Basel risk-based capital framework in the wake of the recent 
financial crisis.\44\ For the Enterprises' trust assets, the 1.5 
percent requirement is calibrated to be comparable to the proposed 
post-CRT credit risk capital requirements for the Enterprises' single-
family and multifamily portfolios as of September 30, 2017. The 
intention of this 1.5 percent requirement, therefore, would be to 
provide a backstop to the proposed credit risk capital requirements to 
address the possibility of credit risk model mis-estimation and pro-
cyclicality risks. The 1.5 percent requirement is also calibrated to be 
lower than the proposed aggregate risk-based capital requirements in 
order to avoid incentives that could reduce the amount of CRT 
transactions conducted by the Enterprises and other distortions in the 
Enterprises' marginal economic decision-making. Finally, the 1.5 
percent requirement is calibrated to recognize that the risk 
composition of the Enterprises' business has fundamentally shifted 
through conservatorship and the requirements of the PSPAs that limit 
the Enterprises' retained portfolios to $250 billion.
---------------------------------------------------------------------------

    \44\ ``An underlying cause of the global financial crisis was 
the build-up of excessive on- and off-balance sheet leverage in the 
banking system. In many cases, banks built up excessive leverage 
while apparently maintaining strong risk-based capital ratios. At 
the height of the crisis, financial markets forced the banking 
sector to reduce its leverage in a manner that amplified downward 
pressures on asset prices. This deleveraging process exacerbated the 
feedback loop between losses, falling bank capital and shrinking 
credit availability.'' Basel Committee on Banking Supervision, 
``Basel III leverage ratio framework and disclosure requirements'' 
(Jan. 2014), p. 1.
---------------------------------------------------------------------------

    Under the bifurcated alternative, as under the 2.5 percent 
alternative, FHFA would retain its authority to increase an 
Enterprise's leverage requirement by regulation or order if the Agency 
determined that capital levels had become too low--for example, because 
of pro-cyclical concerns during a housing bubble--and that it was 
appropriate to increase these levels. FHFA would also have the 
authority, as discussed below, to increase the risk-based capital 
requirements by regulation or order as determined to be appropriate, 
including as a result of pro-cyclical concerns.\45\
---------------------------------------------------------------------------

    \45\ This authority is discussed in greater detail in section 
II.F.
---------------------------------------------------------------------------

    Using the Agency's authority in this way would provide FHFA with 
the ability to increase capital requirements in the event it was deemed 
necessary without the negative consequences of a minimum leverage ratio 
that was the binding constraint, thus discouraging CRT transactions in 
the interim period. One downside of this authority, however, is that 
this flexibility could make it more challenging for the Enterprises to 
make capital allocation decisions as FHFA's use of this authority may 
be difficult to anticipate.
Impact of the Bifurcated Minimum Leverage Capital Requirement 
Alternative
    If the bifurcated minimum leverage capital requirement alternative 
had been in place at the end of the third quarter of 2017, the combined 
requirement for the Enterprises would have been $103 billion or 1.9 
percent of assets. Of this, $72 billion would have been for trust 
assets and $32 billion would have been for non-trust assets. Fannie 
Mae's requirement would have been $60 billion based on total ending 
assets of $3.4 trillion, representing a 1.8 percent total minimum 
leverage requirement, with $44 billion of capital required for trust 
assets and $16 billion for non-trust assets. Freddie Mac's minimum 
leverage capital requirement would have been

[[Page 33384]]

$43 billion based on total ending assets of $2.2 trillion representing 
a 1.9 percent total minimum leverage requirement, with $28 billion of 
capital required for trust assets and $16 billion for non-trust assets.
    If implemented today, both Enterprises' risk-based capital 
requirements would, by significant margins, be the binding constraints. 
Fannie Mae's risk-based capital requirement would have been $115 
billion or 3.4 percent as of September 30, 2017, while Freddie Mac's 
risk-based capital requirement would have been $66 billion or 3.0 
percent as of September 30, 2017.

   Table 36--Bifurcated Minimum Leverage Capital Requirement Alternative Comparison to the Proposed Risk-Based
                                              Capital Requirements
----------------------------------------------------------------------------------------------------------------
                                                                     Fannie Mae     Freddie Mac     Enterprises
                                                                 --------------------------------    combined
                                                                                                 ---------------
                                                                      Capital         Capital         Capital
                                                                    requirement     requirement     requirement
                                                                    ($billions)     ($billions)     ($billions)
----------------------------------------------------------------------------------------------------------------
Bifurcated Alternative..........................................           $60.4           $43.1          $103.5
Risk-Based Capital Requirement..................................          $115.0           $65.9          $180.9
Bifurcated Alternative as % of Risk-based Capital Requirement...             53%             65%             57%
    Going-Concern Buffer........................................         ($24.0)         ($15.9)         ($39.9)
                                                                 -----------------------------------------------
Risk-Based Capital Requirement Less Going-Concern Buffer........           $91.0           $50.0          $141.0
Bifurcated Alternative as % of Risk-based Capital Requirement                66%             86%             73%
 Less Going-Concern Buffer......................................
Net Credit Risk Capital Requirement *...........................           $70.5           $41.5          $112.0
Bifurcated Alternative as % of Net Credit Risk Capital                       86%            104%             92%
 Requirement....................................................
    Credit Risk Transferred.....................................         ($11.5)         ($10.0)         ($21.5)
                                                                 -----------------------------------------------
Post-CRT Net Credit Risk Capital Requirement....................           $59.0           $31.5           $90.5
Bifurcated Alternative as % of Post-CRT Net Credit Risk Capital             102%            137%            114%
 Requirement....................................................
----------------------------------------------------------------------------------------------------------------
* Risk-based capital requirement less going-concern buffer, market risk, operational risk, and DTA capital
  requirements.

Methodology for Developing the Bifurcated Minimum Leverage Capital 
Requirement Alternative
    The bifurcated alternative considers the relative funding risks of 
the Enterprises' trust assets compared to the Enterprises' non-trust 
assets, and includes different requirements for each of these 
categories. In developing the bifurcated alternative, FHFA considered 
how to design the leverage requirement so it would serve as a backstop 
for the risk-based capital requirements proposed in this rulemaking 
without adversely impacting the Enterprises' marginal economic 
decision-making. For the non-trust asset component of the bifurcated 
alternative, FHFA further considered its comparability to the bank 
leverage requirement. For the trust asset component of the bifurcated 
alternative, FHFA considered its comparability to the credit risk 
capital requirements in the proposed rule.
Funding and Other Risks of the Enterprises' Business Model
    As discussed earlier, the Enterprises' assets can be distinguished 
between non-trust assets funded by debt and derivatives, which could be 
subject to deleveraging pressures, and MBS and participation 
certificate trust assets, which are not funded by the Enterprises or 
subject to such pressure, and consequently would have a lower leverage 
requirement under the bifurcated alternative. That distinction is also 
consistent with the distinction made in the Safety and Soundness Act 
minimum leverage ratios between on-balance sheet assets (under then-
applicable accounting treatment) and off-balance sheet assets, with the 
latter having a much lower leverage ratio. While FHFA believes that 
both of the statutory leverage minimums are much too low to be safe and 
sound, the concept of different ratios for different aspects of the 
Enterprises' business could be implemented at higher levels as proposed 
under the bifurcated alternative. The relative funding and other risks 
of the Enterprises' trust assets and non-trust assets are described 
below.
Trust Assets
    For the Enterprises' credit guarantee business, the bifurcated 
minimum leverage capital requirement alternative would require less 
capital for mortgage assets held in trust accounts than for non-trust 
assets (including those held in the retained portfolio). This lower 
level reflects that both Fannie Mae and Freddie Mac purchase single-
family and multifamily mortgages that they package into mortgage-backed 
securities and sell to investors, which substantially reduces the 
funding risk of purchasing these mortgage assets.
    On the single-family side, the Enterprises operate nearly identical 
securitization models. Fannie Mae and Freddie Mac sell MBS to investors 
through either of two methods--first, where lenders provide loans to an 
Enterprise in exchange for mortgage-backed securities based on those 
same loans, or second where lenders sell loans to an Enterprise in 
exchange for cash. When purchasing loans through the second method, the 
Enterprise aggregates the loans, securitizes them, and then sells the 
resulting MBS to investors for cash. In both cases, the Enterprises 
guarantee the timely payment of principal and interest to MBS investors 
and charge a guarantee fee for doing so.
    The single-family securitization process provides the Enterprises 
with a stable funding source that is match-funded with the mortgage 
assets they purchase. The securitizations are consolidated on the 
Enterprises' balance sheets, showing both the mortgage assets held in 
trust accounts as well as the payments owed to MBS investors. 
Investments in MBS cannot be withdrawn from existing securities during 
times of market stress, which differentiates them from the banking 
deposits and short-term debt relied upon by banks, which can leave 
banks in need of new funding at times when debt funding becomes harder 
and more expensive to obtain. In contrast, the Enterprises' stable 
funding reduces risk to the Enterprises during times of market stress 
and economic downturns.

[[Page 33385]]

    In addition to transferring funding risk to investors, the 
Enterprises transfer other risks of single-family mortgages held in 
trust accounts in several ways. The securitization process itself 
results in transferring the interest rate and market risk of these 
mortgages to investors. In addition, because the securitization process 
does not transfer the credit risk of securitized single-family 
mortgages, the Enterprises have also developed credit risk transfer 
programs that transfer a substantial portion of the credit risk on 
these loans to private investors through separate CRT transactions. The 
credit risk of an individual loan is the same whether it is securitized 
or held as a whole loan in a retained portfolio, but the Enterprises' 
existing CRT programs currently focus on transferring credit risk on 
loans held in trust accounts.
    The resulting risks the Enterprises must manage for single-family 
mortgage assets held in trust accounts differ substantially from the 
risks faced by the Enterprises and banks from the assets they hold in 
their retained portfolios--both when looking at the overall asset 
composition of banks and the relative risk of the mortgage assets held 
on bank balance sheets. Most of the Enterprises' assets are conforming 
residential mortgages, which have a 50 percent risk weight in the Basel 
standardized approach. When FHFA looked at the average risk weight for 
a group of large banks, as discussed earlier, it estimated an overall 
risk-weighted asset density of 72 percent for the banks compared to 50 
percent for residential mortgages guaranteed by the Enterprises. In 
addition, banks hold a greater degree of risk for the whole residential 
mortgage loans on their balance sheets compared to Enterprise mortgage 
assets held in trust accounts. First, whole loans held on-balance sheet 
do not benefit from the match-funding securitization benefit of 
transferring interest rate and market risk to investors. Second, banks 
also do not have CRT programs comparable to the Enterprises to transfer 
the credit risk of these loans to other private actors.
    With respect to the Enterprises' multifamily business lines, the 
Enterprises use different business models but both multifamily credit 
guarantee businesses involve securitizing the multifamily loans each 
company purchases and providing for credit risk sharing with the 
private sector. Fannie Mae primarily utilizes a loss-sharing model 
referred to as DUS (Delegated Underwriting and Servicing), and Freddie 
Mac predominately uses a structured mortgage-backed securities model 
referred to as K-deals.
    Fannie Mae's DUS program delegates most underwriting of multifamily 
loans to a set of approved lenders. In general, the vast majority of 
multifamily loans purchased by Fannie Mae are individually securitized 
in a trust and sold to investors as MBS as opposed to held on Fannie 
Mae's balance sheet as whole loans. These lenders usually participate 
in loss-sharing agreements with Fannie Mae under which they agree to 
take on a pro rata share of losses. Nearly every multifamily loan 
purchased by Fannie Mae includes a loss-sharing agreement with the 
originating lender. The amount of loss borne by the lender varies based 
on their financial strength, but a majority of purchased loans include 
a significant portion of risk shared with the lender (between 25 and 33 
percent of the unpaid principal balance). As with its single-family 
business line, Fannie Mae guarantees the timely payment of principal 
and interest on the multifamily MBS it issues.
    Freddie Mac's principal multifamily model--referred to as K-deals--
involves purchasing and aggregating multifamily loans and then 
securitizing those loans. Once the loans are aggregated, Freddie Mac 
sells a pool of them to a third party trust. The trust issues 
subordinated tranches of MBS, which are sold, without a guarantee, to 
investors. The subordinated tranches, in general, represent between 15 
and 17 percent of underlying UPB of the mortgage pool and assume a 
first loss position in the securitization structure. The trust also 
issues senior tranches representing the balance of the mortgage pool, 
which are then purchased by Freddie Mac. Freddie Mac places the senior 
tranches of securities in a trust that issues pass-through certificates 
(K-certificates) that Freddie Mac guarantees and sells. This 
securitization structure transfers the vast majority of the underlying 
credit risk from these mortgages, as well as all the funding risk.
    Despite the difference in executions, both Enterprises' multifamily 
models result in the same match-funding that exists for single-family 
securitizations, and, with the exception of Freddie Mac's K-deals, the 
senior tranches of which are reported as off-balance sheet guarantees, 
both the multifamily assets held in trust accounts and the liabilities 
owed to multifamily investors are reflected on the Enterprises' balance 
sheets. Like the Enterprises' single-family securitizations, the 
approach to securitizing and transferring credit risk on multifamily 
loans also distinguishes it from whole multifamily loans held on a 
bank's balance sheet.
Non-Trust Assets
    The bifurcated minimum leverage capital requirement alternative 
would require more capital for the Enterprises' non-trust assets, 
including assets held in the Enterprises' retained portfolios, than for 
trust assets, which takes into consideration the higher risks the 
Enterprises must manage for these assets. Unlike their credit guarantee 
business, the Enterprises' retained portfolios expose the companies to 
leverage and funding risks for these assets, as well as interest rate, 
operational, and credit risk.
    Prior to conservatorship, the Enterprises held large retained 
portfolios to generate investment returns. While in conservatorship, 
the Enterprises have substantially reduced their legacy asset levels 
but continue to hold assets in their retained portfolios for three 
purposes that support their credit guarantee business: (1) Purchasing 
loans to support single-family and multifamily loan aggregation for 
subsequent securitizations; (2) purchasing delinquent loans out of MBS 
and engaging in loss mitigation options with borrowers; and (3) 
supporting limited, approved affordable housing objectives where 
securitization is not yet a viable market option. Single-family loan 
aggregation may expose the Enterprises to credit, interest rate, and 
funding risk as Enterprises hold onto newly originated loans ahead of 
securitization. The Enterprises hold these loans on balance sheet for a 
limited period, generally no more than 90 days, in order to aggregate 
sufficient quantities before securitization. In addition, Freddie Mac's 
multifamily business includes a similar aggregation function, whereas 
Fannie Mae's multifamily MBS are primarily single loan securities and, 
thus, do not require significant portfolio capacity for loan 
aggregation.
    The Enterprises have reduced their retained portfolios by a 
combined 60 percent since entering conservatorship, which has reduced 
their overall risk exposure but has not eliminated risk for the 
remaining assets held in their retained portfolios. These assets 
include some pre-conservatorship assets held on their books, such as 
PLS, although the Enterprises have disposed of the majority of these 
assets.
    Both companies issue unsecured debt to fund their retained 
portfolios holdings, and this debt exposes the companies to funding 
risk for retained portfolio assets, which mortgage assets held in trust 
accounts do not have. In times of market stress or economic downturns, 
as debt matures the

[[Page 33386]]

Enterprises would need to issue new, unsecured debt in order to fund 
and support assets already held on their retained portfolios. Because 
this funding could be more expensive or harder to obtain in a stressed 
market, this could result in increased risk to the Enterprise.
    The nature of the Enterprises' retained portfolios makes these 
assets more comparable to the risks banks have from assets held on 
their balance sheets. In addition to having more funding risk, the 
Enterprises must also manage interest rate, operational, and credit 
risk for the mortgage assets held in their retained portfolio, which is 
like the risks managed by banks for whole mortgage loans.
    By specifying a higher leverage requirement for non-trust assets 
under the bifurcated alternative, the minimum leverage capital 
requirement would significantly increase in the event the Enterprises' 
grew their retained portfolio in the future, as could occur during a 
downturn if the Enterprises purchased significant numbers of newly 
delinquent loans out of mortgage-backed securities in order to mitigate 
losses and facilitate loss mitigation options for borrowers. 
Conversely, under the bifurcated alternative, the minimum leverage 
capital requirement for the Enterprises could decline in the future as 
the Enterprises continue to dispose of legacy retained portfolio assets 
and to sell or re-securitize seriously delinquent or re-performing 
loans.
Minimum Leverage Requirement as a Backstop to the Proposed Risk-Based 
Capital Requirements
    The bifurcated alternative seeks to calibrate the minimum leverage 
requirement so that it provides a backstop to the proposed risk-based 
capital requirements, but with less likelihood that it becomes the 
binding capital constraint for the Enterprises. The bifurcated 
alternative identifies the proposed risk-based capital requirements as 
the primary or benchmark capital measure for the Enterprises. Such an 
approach would rely on the view that the proposed risk-based capital 
requirements included in this rulemaking are a detailed and robust 
assessment of risk to Fannie Mae and Freddie Mac and that the purpose 
of the minimum leverage capital requirement would be to serve as a 
backstop to guard against the potential that the risk-based 
requirements would underestimate the risk of an Enterprises' assets, 
due to model risk or pro-cyclicality for example.
    As detailed earlier, the risk-based capital portion of the proposed 
rule provides a granular assessment of credit risk specific to 
different mortgage loan categories, as well as market risk and 
operational risk components. The proposed risk-based requirements are, 
in part, modeled on empirical losses experienced by the Enterprises as 
a result of the recent severe financial crisis over the full life of 
the loans. The capital required for the Enterprises would be required 
and in place at the date of loan acquisition and would not take into 
account any revenues from guarantee fees that they will earn. On top of 
these risk-based components, the proposed rule includes a risk-
insensitive going-concern buffer as part of the risk-based capital 
requirements to ensure that an Enterprise could continue to write new 
business for what is projected to be a year or two following a period 
of market stress or a severe economic downturn.
    The leverage requirements under the proposed bifurcated alternative 
also take into consideration the potential impacts that a binding 
minimum leverage requirement could have on an Enterprise's economic 
incentives to conduct--or not conduct--certain business transactions. 
This impact on business transactions could be felt across an 
Enterprises' business, including which mortgage loans to purchase for 
securitization, whether to buy or sell particular assets for their 
retained portfolios, whether to engage in CRT transactions and which 
transactions to engage in, and what liquidity positions to hold for 
periods of market stress. The economic incentives created by a binding 
leverage ratio could increase the overall risk profile of an 
Enterprises' book of business relative to its current operations. As a 
result, while a binding minimum leverage requirement would result in 
higher Enterprise capital levels, such a requirement would not 
necessarily make an Enterprise more safe and sound.
    More specifically, under a binding minimum leverage requirement, an 
Enterprise could have reduced economic incentives to differentiate 
among the relative riskiness of different mortgage loans purchased for 
securitization. For example, under a scenario where the total risk-
based capital requirement was 2.5 percent and the minimum leverage 
requirement was 4 percent, an Enterprise would have an economic 
incentive to increase the risk-level of its aggregate loan purchases up 
to the 4 percent level since the Enterprise would be required to hold 4 
percent capital regardless of the riskiness of its assets. This could 
encourage an Enterprise to purchase loans with multiple risk layers--
such as loans with higher LTVs, adjustable rates, and investor owned 
properties--in order to earn enough of a return to be commensurate with 
the capital requirement. Conversely, under this hypothetical, an 
Enterprise would have a disincentive to purchase lower-risk loans--such 
as loans with lower LTVs and 15-year terms--because they would make it 
more difficult to earn a sufficient return relative to the binding 
capital requirement. Taken together, these economic incentives could 
lead an Enterprise to purchase more loans with multiple risk-layering 
features that could, in turn, result in a higher risk composition of 
assets. By contrast, under the proposed risk-based capital rule, 
whenever the Enterprise purchases or guarantees a riskier asset, its 
required capital would automatically increase. If the minimum leverage 
requirement were the binding capital constraint and did not distinguish 
between retained portfolio and trust assets, an Enterprise would also 
have an economic incentive to increase the risk of assets held or 
reduce holding of low-risk assets in their retained portfolio until the 
risk-based capital requirement increases to the level of the minimum 
leverage requirement.
    A binding minimum leverage ratio could also have an impact on the 
Enterprises' incentives to conduct credit risk transfer transactions. 
In this proposed rule, an Enterprise would receive capital relief for 
CRT transactions under the risk-based capital framework but not the 
minimum leverage requirement. As a result, a minimum leverage ratio 
that is set too high could lead to a capital requirement that exceeds 
the post-CRT risk-based capital requirement. An example helps 
illustrate this dynamic. If an Enterprise transferred credit risk to 
private investors through fully-funded STACR or CAS transactions with 
no counterparty exposure, an Enterprise's pre-CRT risk-based capital 
requirement would be reduced to account for the credit risk transferred 
for these loans. For example, a pre-CRT risk-based requirement of 4.5 
percent could be reduced to a post-CRT risk-based requirement of 2 
percent. However, a minimum leverage requirement that is set at 4 
percent would become the binding capital requirement, because it would 
not be reduced by the equivalent amount of credit risk transferred 
through CRT transactions.
    Under this example, a minimum leverage requirement of 4 percent 
would likely result in an Enterprise declining to conduct these CRT 
transactions because the Enterprise would need to pay for credit risk 
protection twice--

[[Page 33387]]

once through the cost of holding more capital than required under the 
risk-based capital requirement and a second time through the cost of 
paying private investors for the credit risk protection provided 
through CRT transactions.
    As illustrated by this example, it is important to consider how a 
minimum leverage requirement and the proposed risk-based capital 
requirements would interact with one another, and what the resulting 
effect would be on the Enterprises' incentives to conduct CRT 
transactions or other risk reducing transactions. As conservator of the 
Enterprises, FHFA has required Fannie Mae and Freddie Mac to develop 
CRT programs that transfer a meaningful amount of credit risk to 
private investors in an economically sensible manner. FHFA believes 
that these programs are an effective way to reduce risk to the 
Enterprises and, therefore, to taxpayers. Enterprise CRT transactions 
effectively transfer credit risk to the private sector, and, for many 
transactions, do so in a way that is fully funded up-front, without 
counterparty risk. In other CRT transactions, the Enterprises require 
that the transactions be partially collateralized to mitigate 
counterparty risk. If capital requirements caused the Enterprises to 
reduce the amount of CRT transactions they conducted, this could result 
in a greater concentration of credit risk with the Enterprises and 
could be counter to FHFA's overall objective of reducing credit risk to 
the Enterprises and taxpayers.
Proposed Leverage Requirements Under the Bifurcated Alternative
    The total leverage requirement under the proposed bifurcated 
alternative would be the result of blending the 4 percent requirement 
for non-trust assets and the 1.5 percent requirement for trust assets. 
While the bifurcated alternative would provide an overall minimum 
leverage capital requirement that would almost certainly be less than 
the 2.5 percent alternative, it could also provide a backstop to guard 
against Enterprise capital becoming too low. The requirements included 
in the bifurcated alternative are intended to limit the instances in 
which the minimum leverage capital requirement would serve as the 
Enterprises' binding capital constraint and, as a result, limit the 
negative impacts of a binding leverage requirement.
    The proposed leverage requirements under the bifurcated alternative 
would produce a total leverage requirement that is calibrated to 
provide a significant backstop to the post-CRT credit risk capital 
component of the proposed risk-based capital requirements for both 
single-family and multifamily whole loans and guarantees currently on 
the Enterprises' balance sheets. For Fannie Mae, the bifurcated 
alternative would produce a 1.8 percent minimum leverage requirement as 
of September 30, 2017. The total leverage requirement of 1.8 percent 
compares to a total risk-based capital requirement of 3.4 percent as 
currently calculated under the proposed rule, which includes credit 
risk, operational risk, market risk, and the going-concern buffer, and 
2.7 percent excluding the going-concern buffer. In making a comparison 
specifically with the credit risk component of the proposed risk-based 
capital framework, the 1.8 percent total leverage requirement compares 
to a 1.8 percent post-CRT net credit risk capital requirement. As a 
result, the 1.8 percent leverage level would reach 100 percent of 
Fannie Mae's proposed post-CRT net credit risk capital requirement for 
the third quarter of 2017.
    For Freddie Mac, the proposed leverage requirements under the 
bifurcated alternative would produce a 1.9 percent minimum leverage 
requirement as of September 30, 2017. The total leverage requirement of 
1.9 percent compares to a total risk-based capital requirement of 3.0 
percent as currently calculated under the proposed rule, which includes 
credit risk, operational risk, market risk, and the going-concern 
buffer, and 2.3 percent excluding the going-concern buffer. In making a 
comparison specifically with the credit risk component of the proposed 
risk-based capital framework, the 1.9 percent total leverage 
requirement compares to a 1.4 percent post-CRT net credit risk capital 
requirement. As a result, the 1.9 percent leverage level would reach 
135 percent of Freddie Mac's proposed post-CRT net credit risk capital 
requirement for the third quarter of 2017.
Non-Trust Assets
    As noted earlier, under the bifurcated alternative the proposed 4 
percent leverage requirement for the Enterprises' non-trust assets, 
which include the retained portfolios, would be comparable to the 
leverage requirement for depository institutions. This approach would 
align the riskiest part of the Enterprises' business, the part that is 
most comparable with the funding risk of depository institutions, with 
the leverage requirement established by other federal financial 
regulators.\46\
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    \46\ Federal financial regulators have established a 4 percent 
leverage ratio for depository institutions and the asset base does 
not include off-balance sheet assets. In addition, regulators have 
established a 3 percent supplemental leverage ratio that applies to 
designated depository institutions and the asset base includes off-
balance sheet assets. Similarly, the enhanced supplemental leverage 
ratio is set at 5 percent and applies to an even narrower subset of 
depository institutions and the asset base also includes off-balance 
sheet assets.
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    Because cash and cash equivalents are components of the retained 
portfolio, the bifurcated alternative would include cash and cash 
equivalents in the asset base for the 4 percent minimum leverage 
capital requirement. While cash and cash equivalents are highly liquid 
investment securities, they remain subject to funding risk in much the 
same way as other Enterprise portfolio assets, although because of 
their liquidity deleveraging with respect to them would not create the 
same downward pressure on asset values as for other types of assets.
Trust Assets
    The bifurcated alternative includes a 1.5 percent leverage 
requirement for trust assets.\47\ This proposed requirement seeks to 
balance the objectives of providing a sufficient backstop to the risk-
based capital requirements and avoiding negative economic incentives 
that could reduce the usage of CRT transactions or otherwise increase 
Enterprise risk levels.
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    \47\ The bifurcated alternative would also assign the 1.5 
percent minimum leverage ratio to assets categorized under 
accounting standards as off-balance sheet assets. Both Enterprises 
have limited legacy off-balance sheet assets. In addition, Freddie 
Mac's guaranteed senior tranches of its multifamily securities, most 
commonly through its K-deal securitizations, are the only off-
balance sheet assets either Enterprise currently acquires. These 
guarantees do constitute credit risk that Freddie Mac assumes, 
although the deep subordination provided by the junior tranches that 
are not guaranteed and are sold to private investors provide 
significant credit protection to these guarantees.
---------------------------------------------------------------------------

    The 1.5 percent requirement for trust assets under the proposed 
bifurcated alternative could provide a significant backstop when 
compared to the credit risk capital requirements for Enterprise trust 
assets under the proposed risk-based capital requirements. In this 
comparison, FHFA has defined trust assets to include new single-family 
acquisitions, performing single-family seasoned loans, and all 
multifamily loans held in trust accounts. Trust assets exclude re-
performing single-family loans and non-performing single-family loans 
that are now held by the Enterprises in their retained portfolios, and 
these assets would have a 4 percent minimum leverage requirement under 
the bifurcated alternative.
    For Fannie Mae, the proposed 1.5 percent leverage requirement for 
trust assets would compare to a 1.3 percent

[[Page 33388]]

post-CRT net credit risk capital requirement. As a result, the 1.5 
percent leverage requirement would reach 115 percent of Fannie Mae's 
proposed post-CRT net credit risk capital requirement for all trust 
assets. For Freddie Mac, the proposed 1.5 percent leverage requirement 
for trust assets would compare to a 1.1 percent post-CRT net credit 
risk capital requirement. As a result, the 1.5 percent leverage 
requirement would reach 136 percent of Freddie Mac's proposed post-CRT 
net credit risk capital requirement for all trust assets as of the 
third quarter of 2017.
    While this bifurcated minimum leverage capital requirement 
alternative could provide a significant backstop for the capital 
necessary to withstand credit losses in a severe stress scenario, the 
proposed risk-based capital requirements would in most circumstances 
remain the binding capital constraint for the Enterprises even after 
accounting for CRT. This is because the post-CRT net credit risk 
capital requirement is only one component of the total risk-based 
capital framework proposed in this rulemaking, which also has 
components for market risk, operational risk, and a going-concern 
buffer.
    Considering the Enterprises' current use of CRT, a 1.5 percent 
minimum leverage requirement for trust assets could provide additional 
protection during a period of rapid appreciation in home prices beyond 
the protection provided by the proposed credit risk capital 
requirements, and could be a sufficient backstop for potential 
shortcomings of the proposed credit risk capital requirements such as 
mis-estimations of stress losses. Should FHFA determine that the 
leverage requirement is insufficient to address rapid and unsustainable 
home price appreciation, FHFA could also use its authority, described 
above, to adjust by order or regulation either the risk-based capital 
requirement, the leverage requirement, or both.
    Question 28: Should FHFA consider additional capital buffers, such 
as buffers to address pro-cyclical risks, in addition to the leverage 
ratio and FHFA's existing authority to temporarily increase Enterprise 
leverage requirements and why?
    Question 29: FHFA is soliciting comments on the advantages and 
disadvantages of setting a single minimum leverage capital requirement 
under the 2.5 percent alternative. FHFA is seeking views both on this 
general approach and the minimum requirements proposed in the 2.5 
percent alternative. FHFA is requesting data and supplementary analysis 
that would support consideration of alternative requirements for a 
single minimum capital requirement.
    Question 30: FHFA is soliciting comments on the advantages and 
disadvantages of the bifurcated alternative and establishing minimum 
leverage capital requirements of 1.5 percent for mortgage assets held 
in trusts and 4 percent for retained portfolio assets. FHFA is seeking 
views both on this general approach and the minimum requirements 
proposed in the bifurcated alternative. FHFA is requesting data and 
supplementary analysis that would support consideration of alternative 
approaches or requirements.
    Question 31: FHFA is soliciting comments that provide feedback on 
the relative advantages and disadvantages of the 2.5 percent 
alternative and the bifurcated alternative.
    Question 32: Instead of adopting the 2.5 percent alternative or 
bifurcated alternative as proposed, should FHFA, instead, adopt another 
approach to the minimum leverage capital requirement that provides a 
separate leverage requirement specifically for assets that are part of 
credit risk transfer transactions? If so, why? FHFA is requesting data 
and supplementary analysis that would support consideration of 
alternative measures.
    Question 33: Given the high quality and short duration of cash and 
cash equivalent assets, should FHFA consider a lower and separate 
leverage ratio for these assets so as to not discourage the Enterprises 
from holding cash and cash equivalent assets to support liquidity? For 
the bifurcated alternative, should cash and cash equivalent assets be 
subject to the 1.5 percent leverage requirement rather than the 4 
percent requirement? FHFA is requesting data and supplementary analysis 
that would support consideration of alternative measures.
    Question 34: FHFA is soliciting comments on the advantages and 
disadvantages of including off-balance sheet exposures in the 2.5 
percent leverage ratio alternative, and whether off-balance sheet 
assets should be included in the non-trust assets (which includes the 
retained portfolio) or trust assets component of the bifurcated 
alternative. FHFA is requesting data and supplementary analysis that 
would support alternative perspectives.

E. Definition of Capital

    This section corresponds to Proposed Rule Sec.  1240.1(a).
    The Safety and Soundness Act includes definitions of core capital 
and total capital. FHFA does not have the authority to change those 
definitions in the proposed rule, in contrast to the banking regulators 
who have greater definitional flexibility under their statutes. 
Therefore, the proposed rule uses the statutory definitions of core 
capital and total capital for the Enterprises.
    Using the statutory definitions, core capital means the sum of the 
following (as determined in accordance with GAAP): (i) The par or 
stated value of outstanding common stock; (ii) the par or stated value 
of outstanding perpetual, noncumulative preferred stock; (iii) paid-in 
capital; and (iv) retained earnings.
    The statutory definition of core capital for the Enterprises does 
not reflect any specific considerations for deferred tax assets (DTAs). 
DTAs are recognized based on the expected future tax consequences 
related to existing temporary differences between the financial 
reporting and tax reporting of existing assets and liabilities given 
established tax rates. In general, DTAs are considered a component of 
capital because these assets are capable of absorbing and offsetting 
losses through the reduction to taxes. However, DTAs may provide 
minimal to no loss-absorbing capability during a period of stress as 
recoverability (via taxable income) may become uncertain.
    In 2008, during the financial crisis, both Enterprises concluded 
that the realization of existing DTAs was uncertain based on estimated 
future taxable income. Accordingly, both Enterprises established 
partial valuation allowances on DTAs. A valuation allowance on DTAs is 
typically established when all or a portion of DTAs is unlikely to be 
realized considering projections of future taxable income, resulting in 
a non-cash charge to income and a reduction to the retained earnings 
component of capital. Fannie Mae established a partial valuation 
allowance on DTAs of $30.8 billion in 2008, which was a major 
contributor to the overall capital reduction of $66.5 billion at Fannie 
Mae in 2008. Similarly, Freddie Mac established a partial valuation 
allowance on DTAs of $22.4 billion in 2008, which was also a major 
contributor to the overall capital reduction of $71.4 billion at 
Freddie Mac in 2008.
    Other financial regulators recognize the limited loss absorbing 
capability of DTAs, and therefore limit the amount of DTAs that may be 
included in CET1 capital. Under Basel III guidance, federally regulated 
bank holding companies are subject to threshold

[[Page 33389]]

deductions, up to and including full deductions, associated with DTAs 
related to temporary timing differences.
    Basel III capital rules also include accumulated other 
comprehensive income (AOCI) in the determination of regulatory Tier 1 
capital. For the Enterprises, the statutory definition of core capital 
does not include AOCI. Generally, AOCI primarily consists of unrealized 
gains and losses on available-for-sale securities, which are measured 
at fair value on the Enterprises' consolidated balance sheets. 
Consequently, AOCI can be positive or negative depending on the 
prevailing market conditions for the Enterprises' available-for-sale 
securities. For example, at the end of 2008, AOCI at Fannie Mae and 
Freddie Mac was negative $7.7 billion and negative $26.4 billion, 
respectively. As a result, by excluding AOCI from core capital, an 
Enterprise may be adequately capitalized for regulatory purposes, but 
insolvent under GAAP.
    Total capital, using the statutory definition, means the sum of the 
following: (1) Core capital of an Enterprise; (2) a general allowance 
for foreclosure losses, which (i) shall include an allowance for 
portfolio mortgage losses, non-reimbursable foreclosure costs on 
government claims, and an allowance for liabilities reflected on the 
balance sheet for the Enterprise for estimated foreclosure losses on 
mortgage-backed securities; and (ii) shall not include any reserves of 
the Enterprise made or held against specific assets; and (3) any other 
amounts from sources of funds available to absorb losses incurred by 
the Enterprise, that the Director by regulation determines are 
appropriate to include in determining total capital.
    Question 35: FHFA is soliciting comments on the capital treatment 
of DTAs and AOCI. How should FHFA incorporate the potential impact of 
DTAs and AOCI, given that FHFA cannot change the definition of core 
capital as provided in the statute? What additional modifications to 
the proposed capital requirement for DTAs should FHFA consider, and 
why? What additional modifications to the proposed capital requirement 
for AOCI should FHFA consider, and why? Is AOCI a suitable other source 
of loss-absorbing capacity for purposes of the statutory definition of 
total capital?
    Question 36: FHFA is soliciting comments on the capital treatment 
of outstanding perpetual, noncumulative preferred stock. Given that 
FHFA cannot change the definition of core capital as provided in the 
statute, what modifications should FHFA consider and why?
    Question 37: Given that loss reserves are for expected losses and 
capital is for unexpected losses, FHFA is soliciting comments on the 
appropriateness of including loss reserves in the definition of total 
capital. Should loss reserves be added to the proposed risk-based 
capital requirements in order to offset their inclusion in total 
capital?

F. Temporary Adjustments to Minimum Leverage and Risk-Based Capital 
Requirements

    FHFA has additional existing regulatory flexibility so that capital 
requirements can be adjusted by order to address periods of heightened 
risk. While the proposed risk-based and leverage capital requirements 
may be amended by subsequent regulation, revising them would generally 
require soliciting and incorporating public input and would likely be 
time-intensive. This process would make it difficult for the capital 
requirements to quickly address new developments and anticipate rapidly 
emerging risks. The current provisions authorizing FHFA to adjust both 
risk-based and minimum leverage capital requirements allow FHFA to 
respond more quickly to market and business developments and require 
greater retention of capital when circumstances warrant it. This 
additional flexibility also mitigates the pro-cyclicality of risk-based 
capital standards.
    Risk-based capital requirements may fail to adequately capture the 
risks facing an institution. For example, any capital framework that 
depends on models to assign risk-weights will be subject to model 
estimation error risk. In addition, such an approach may not adequately 
account for the risk related to a new asset or product. As discussed 
earlier, new or previously unassigned activities would be given an 
interim risk-weighting under the proposed risk-based capital 
requirements. The lack of historical performance data for new products 
increases the risk that an interim risk-weight assessment may prove 
inadequate and that this risk would be compounded by growth of the new 
product.
    Risk-based capital requirements are sensitive to changes in house 
prices because risk weights are tied to LTV ratios. During periods of 
rapid house price appreciation, risk-based capital requirements for the 
Enterprises will fall as LTVs fall. As the experience from the most 
recent financial crisis reflects, housing downturns are often preceded 
by rapid house price appreciation. This means that the risk-based 
capital requirements, considered in isolation, can be pro-cyclical and 
can lead to the shedding of loss-absorbing capital ahead of a period of 
sustained credit losses.
    HERA anticipated the need for flexibility in developing capital 
standards and granted FHFA discretion to make capital adjustments for 
both risk-based capital requirements and leverage requirements in order 
to maintain the safety and soundness of the Enterprises. In 2011, FHFA 
promulgated regulations describing how FHFA could implement a temporary 
increase through order in the leverage requirements under HERA.\48\ 
Under the regulation, FHFA may consider different factors in making a 
determination to increase minimum leverage capital requirements, 
including the value of Enterprise assets; the Enterprises' ability to 
access liquidity as well as credit and market risk; initiatives that 
entail heightened risks; current and potential declines in Enterprise 
capital; housing finance market conditions; and other conditions as 
described by the Director.
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    \48\ 12 CFR part 1225. ``FHFA is responsible for ensuring the 
safe and sound operation of regulated entities. In furtherance of 
that responsibility, this part sets forth standards and procedures 
FHFA will employ to determine whether to require or rescind a 
temporary increase in the minimum capital levels for a regulated 
entity or entities pursuant to 12 U.S.C. 4612(d).''
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    This authority provides FHFA with the flexibility to adjust 
leverage requirements in an overheating mortgage market when risk-based 
capital requirements may otherwise lead to the shedding of loss-
absorbing capital. This authority also provides FHFA with the 
flexibility, using the leverage ratio, to address the potential 
inadequacy of capital requirements for new products and it provides 
FHFA with a way to mitigate a latent modeling error on an interim basis 
while risk-based capital requirements are being corrected.
    FHFA also possesses statutory flexibility with respect to the risk-
based capital requirements themselves. While the authority to increase 
minimum leverage capital requirements can mitigate some of the pro-
cyclicality and other issues inherent in a model-based set of 
standards, it can only do so indirectly by requiring more capital to be 
held across all asset classes to which the leverage requirement 
applies. For this reason, FHFA wishes to highlight its statutory 
authority to adjust the risk-based capital requirements for particular 
asset classes directly during periods of heightened risk, when the 
risk-based capital requirements might otherwise be inadequate. 
Elaborating on the earlier example, sustained single-family house

[[Page 33390]]

price appreciation may suggest that the single-family housing sector is 
overheating ahead of a downturn. In this scenario, home prices may be 
artificially inflated and LTV ratios would fall, allowing the 
Enterprises to release capital. FHFA's ability to step in to adjust 
capital treatment for single-family loans, or to augment the single-
family businesses' going-concern buffer, during this period would 
directly address the risk that risk-based capital treatment for these 
assets may become inadequate.
    Authority to adjust the minimum leverage capital requirement can 
address this risk as well, but does so in a less targeted way. Relying 
on the minimal leverage capital adjustment exclusively may lead to 
raising Enterprise-wide capital requirements when a more narrow 
adjustment would suffice from a safety and soundness perspective. This 
overly-broad approach may lead to skewed Enterprise decision-making as 
the leverage requirement becomes greater and approaches becoming the 
binding capital allocation restraint. This concern is discussed in 
greater detail in the section II.D.
    FHFA's existing authority to adjust risk-based capital requirements 
comes from the Safety and Soundness Act. Section 1362(e) provides FHFA 
with authority to implement additional capital requirements with 
respect to any product or activity by the Enterprises ``as the Director 
considers appropriate to ensure that the regulated entity operates in a 
safe and sound manner with sufficient capital and reserves to support 
the risks that arise in the operations and management of the regulated 
entity.'' \49\ This authority may be exercised through order, as 
opposed to regulation, and thus can be implemented swiftly should the 
need to do so arise.
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    \49\ 12 U.S.C. 4612(e).
---------------------------------------------------------------------------

    Question 38: FHFA is soliciting comments on the advantages and 
disadvantages of the existing authority to temporarily increase minimum 
leverage requirements, in particular with respect to the view that use 
of this authority can serve a countercyclical role across economic 
cycles. FHFA is requesting data and supplementary analysis that would 
support alternative perspectives.
    Question 39: Commenters are asked to discuss the advantages and 
disadvantages of adjusting risk-based capital requirements by order 
during periods of heightened risk.
    Question 40: FHFA is soliciting views on how best to identify 
periods of heightened market and Enterprise risk. In particular, what 
economic indicators or other triggers should be considered in 
determining when to require an adjustment to capital requirements and 
how such adjustments might impact capital planning?

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

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

List of Subjects

12 CFR Part 1206

    Federal home loan banks, Reporting and recordkeeping requirements.

12 CFR Part 1240

    Capital, Credit, Enterprise, Investments, Reporting and 
recordkeeping requirements.

12 CFR Part 1750

    Banks, banking, Capital classification, Mortgages, Organization and 
functions (Government agencies), Risk-based capital, Securities.

Authority and Issuance

    For the reasons stated in the preamble, under the authority of 12 
U.S.C. 4511, 4513, 4514, 4526 and 4612, FHFA proposes to amend chapters 
XII and XVII, of title 12 of the Code of Federal Regulations as 
follows:

CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY

SUBCHAPTER A--ORGANIZATION AND OPERATIONS

PART 1206--ASSESSMENTS

0
1. The authority citation for part 1206 continues to read as follows:

    Authority:  12 U.S.C. 4516.

0
2. Amend Sec.  1206.2 by revising the definition of ``Total exposure'' 
to read as follows:


Sec.  1206.2   Definitions.

* * * * *
    Total exposure means the sum of total assets as determined 
according to GAAP, and off-balance sheet guarantees related to 
securitization activities that are used to calculate the quarterly 
minimum leverage capital requirement of the Enterprise under 12 CFR 
part 1240.
* * * * *

SUBCHAPTER C--ENTERPRISES

0
3. Add part 1240 to subchapter C to read as follows:

PART 1240--ENTERPRISE CAPITAL REQUIREMENTS

Sec.
1240.1 Definitions and abbreviations.
1240.2 Board oversight of capital adequacy.
1240.3 Reporting procedure and timing.
1240.4 Risk-based capital requirement components.
1240.5 Single-family whole loans, guarantees, and related securities 
risk-based capital requirement components.
1240.6 Single-family whole loans and guarantees credit risk capital 
requirement methodology.
1240.7 Loan segments for single-family whole loans and guarantees 
credit risk capital requirement.
1240.8 Base credit risk capital requirement for single-family whole 
loans and guarantees.
1240.9 Risk multipliers for single-family whole loans and 
guarantees.
1240.10 Gross credit risk capital requirement for single-family 
whole loans and guarantees.
1240.11 Loan-level credit enhancement impact on gross credit risk 
capital requirement.
1240.12 Counterparty Haircut for single-family whole loans and 
guarantees.
1240.13 Net credit risk capital requirement for single-family whole 
loans and guarantees.
1240.14 Single-family credit risk transfer capital relief for 
single-family whole loans and guarantees.
1240.15 Calculation of capital relief from a single-family CRT.
1240.16 Calculation of total capital relief for single-family whole 
loans and guarantees.
1240.17 Market risk capital requirement for single-family whole 
loans.

[[Page 33391]]

1240.18 Market risk capital requirement for single-family 
securities.
1240.19 Operational risk capital requirement for single-family whole 
loans and guarantees.
1240.20 Operational risk capital requirement for single-family 
securities.
1240.21 Going-concern buffer requirement for single-family whole 
loans and guarantees.
1240.22 Going-concern buffer requirement for single-family 
securities.
1240.23 Aggregate risk-based capital requirement for single-family 
whole loans, guarantees, and related securities.
1240.24 Private-label securities risk-based capital requirement 
components.
1240.25 Credit risk capital requirement for a PLS.
1240.26 Market risk capital requirement for a PLS.
1240.27 Operational risk capital requirement for a PLS.
1240.28 Going-concern buffer requirement for a PLS.
1240.29 Aggregate risk-based capital requirement for PLS.
1240.30 Multifamily whole loans, guarantees, and related securities 
risk-based capital requirement components.
1240.31 Multifamily whole loans and guarantees credit risk capital 
requirement methodology.
1240.32 Loan segments for multifamily whole loans and guarantees 
credit risk capital requirement.
1240.33 Base credit risk capital requirement for multifamily whole 
loans and guarantees.
1240.34 Risk multipliers for multifamily whole loans and guarantees.
1240.35 Gross credit risk capital requirement for multifamily whole 
loans and guarantees.
1240.36 Net credit risk capital requirement for multifamily whole 
loans and guarantees.
1240.37 Multifamily credit risk transfer capital relief for 
multifamily whole loans and guarantees.
1240.38 Calculation of capital relief for a multifamily CRT.
1240.39 Multifamily whole loans market risk capital requirement.
1240.40 Multifamily securities market risk capital requirement.
1240.41 Operational risk capital requirement for multifamily whole 
loans and guarantees.
1240.42 Operational risk capital requirement for multifamily 
securities.
1240.43 Going-concern buffer requirement for multifamily whole loans 
and guarantees.
1240.44 Going-concern buffer requirement for multifamily securities.
1240.45 Aggregate risk-based capital requirement for multifamily 
whole loans, guarantees, and related securities.
1240.46 Non-Enterprise and non-Ginnie Mae commercial mortgage backed 
securities risk-based capital requirement.
1240.47 Other assets and exposures risk-based capital requirement.
1240.48 Unassigned Activities.
1240.49 Aggregate risk-based capital requirement calculation.
1240.50 Minimum leverage capital requirement: 2.5 percent 
alternative.
1240.51 Minimum leverage capital requirement: Bifurcated 
alternative.

    Authority:  12 U.S.C. 4511, 4513, 4514, 4526, 4612.


Sec.  1240.1   Definitions and abbreviations.

    (a) The definitions in this section are used to define terms for 
purposes of this part.
    Amortization term refers to the time period over which the loan is 
contractually scheduled to amortize at origination.
    Basis points (bps) means more than one basis point where a basis 
point equals one hundredth of one percent.
    Charter Act(s) means the Federal National Mortgage Association 
Charter Act, 12 U.S.C. 1716, et seq., and/or the Federal Home Loan 
Mortgage Corporation Act, 12 U.S.C. 1451 note, et seq.
    Charter-level coverage means mortgage insurance coverage levels 
that meet the minimum requirements of the Enterprises' Charter Acts for 
loans with a loan-to-value ratio (LTV) greater than 80%.
    CMBS means commercial mortgage backed securities.
    CMOs means collateralized mortgage obligations held in portfolio 
that are collateralized by an Enterprise or Ginnie Mae MBS.
    Core capital has the meaning provided at 12 U.S.C. 4502(7).
    (i) Core capital is the sum of (as determined in accordance with 
generally accepted accounting principles (GAAP))
    (A) The par or stated value of outstanding common stock;
    (B) The par or stated value of outstanding perpetual, noncumulative 
preferred stock;
    (C) Paid-in capital; and
    (D) Retained earnings.
    (ii) Core capital does not include any amounts the Enterprise could 
be required to pay, at the option of investors, to retire capital 
instruments.
    Counterparty risk haircut (CPHaircut) means a reduction in the 
contractual payments from a counterparty due to the risk that the 
counterparty is unable to meet its obligations.
    Coverage Percent or Coverage Percentage means the percentage 
provided as the benefit under a mortgage insurance policy of the sum of 
UPB, lost interest and foreclosure costs.
    Credit risk means the risk of financial loss to an Enterprise from 
nonperformance by borrowers or other obligors on instruments in which 
an Enterprise has a financial interest.
    Credit risk transfer (CRT) means the transfer of credit risk from 
an Enterprise to an unaffiliated third party or parties through capital 
markets and loss sharing transactions.
    Days means calendar days.
    Deferred tax assets (DTA) mean assets on the balance sheet that may 
be used to reduce taxable income.
    Deferred tax liabilities (DTL) mean tax liabilities deferred to a 
future period.
    Delinquent means one or more missed scheduled payments.
    Enterprise guarantee means a credit guarantee from an Enterprise.
    Ginnie Mae means the Government National Mortgage Association.
    Government guarantee means a credit guarantee from the Federal 
Housing Administration (FHA), United States Department of Agriculture 
(USDA), or the Veterans Administration (VA).
    Guide-level coverage means mortgage insurance coverage levels, 
specified by an Enterprise's Seller Guide, that provide higher levels 
of coverage than required by an Enterprise's Charter Act for loans with 
LTVs greater than 80%. Guide-level coverage is also referred to as 
standard coverage.
    Loan-level credit enhancement means a credit guarantee on an 
individual single-family whole loan. An Enterprise primarily uses a 
loan-level credit enhancement to meet the requirements of its Charter 
Act for a conventional loan with LTV greater than 80%. A conventional 
loan, also known as a conventional mortgage, has the meaning provided 
in the Enterprises' Charter Acts at 12 U.S.C. 1717(b)(2) (Fannie Mae) 
and 12 U.S.C. 1451(i) (Freddie Mac).
    Market risk means the risk that the market value, or estimated fair 
value if market value is not available, of an Enterprise's portfolio 
will decline as a result of changes in interest rates, spreads, foreign 
exchange rates, or equity or commodity prices.
    MBS means a mortgage backed security issued by an Enterprise or 
Ginnie Mae.
    Mortgage insurance (MI) means a loan-level credit enhancement 
provided by an insurance company.
    Multifamily property means a property with five or more residential 
units.
    Multifamily whole loan means a whole loan secured by a mortgage on 
a multifamily property.
    Non-trust assets mean the total assets of an Enterprise as 
determined in accordance with GAAP plus off-balance sheet guarantees 
related to securitization activities minus Trust assets.
    Off-balance sheet guarantees means guarantees of mortgage loan 
securitizations and resecuritizations

[[Page 33392]]

transactions, and other guaranty commitments over which an Enterprises 
does not have control.
    Operational risk means the risk of loss resulting from inadequate 
or failed internal processes, people, or systems, or from external 
events.
    Original means at the origination of the loan.
    Participation certificate means an MBS issued by Freddie Mac.
    Private-label security (PLS) means a single-family residential 
mortgage-backed security issued by an entity other than Fannie Mae, 
Freddie Mac, or Ginnie Mae.
    PLS wrap means a PLS resecuritized with an Enterprise guarantee.
    Refi Plus means Fannie Mae's streamlined refinance program or other 
similar refinance programs that the Director determines should receive 
the same capital treatment.
    Relief Refi means Freddie Mac's streamlined refinance program, or 
other similar refinance programs that the Director determines should 
receive the same capital treatment.
    Reporting date means the date of the portfolio used for risk-based 
capital and minimum capital calculations.
    Single-family property means a property with one-to-four-family 
residential units.
    Single-family whole loan means a whole loan secured by a mortgage 
on a single-family property.
    Spread duration means a measure of the sensitivity of an asset's 
expected price to changes in the asset's spread.
    Spread risk means the risk of a loss in value of an asset relative 
to a risk free or funding benchmark due to changes in perceptions of 
performance or liquidity.
    Supplemental loan means a multifamily loan made to a borrower for a 
property for which the borrower has previously received a loan. There 
can be more than one supplemental loan.
    Total assets mean the total assets of an Enterprise as determined 
in accordance with GAAP.
    Total capital has the meaning provided at 12 U.S.C. 4502(23). It is 
the sum of the following:
    (i) The core capital of an Enterprise.
    (ii) A general allowance for foreclosure losses, which:
    (A) Shall include an allowance for portfolio mortgage losses, 
nonreimbursable foreclosure costs on government claims, and an 
allowance for liabilities reflected on the balance sheet for the 
Enterprise for estimated foreclosure losses on mortgage backed 
securities; and
    (B) Shall not include any reserves of the Enterprise made or held 
against specific assets.
    (iii) Any other amounts from sources of funds available to absorb 
losses incurred by the Enterprise, that the Director by regulation 
determines are appropriate to include in determining total capital.
    Tranche means all securitization exposures associated with a CRT 
that have the same seniority.
    Trust assets means Fannie Mae mortgage-backed securities or Freddie 
Mac participation certificates held by third parties, and off-balance 
sheet guarantees related to securitization activities.
    Whole loan means a single loan that a lender has issued to a 
borrower or borrowers.
    (b) The abbreviations in this paragraph are used as short forms for 
terms used in calculations in this part.

ATCH.........................  Attachment point for a tranche.
BaseCapitalbps...............  Base credit risk capital requirement in
                                basis points.
CapRelief$...................  Capital relief in dollars for an entire
                                CRT.
CEMultiplier.................  Credit enhancement multiplier.
CM%..........................  Capital markets risk relief percentage
                                for single-family CRTs.
CMTCRCbps....................  Tranche credit risk capital associated
                                with the single-family CRT capital
                                markets transaction, in basis points.
CntptyCollat$................  Counterparty collateral in dollars.
CntptyCreditRiskbps..........  Counterparty credit risk capital in basis
                                points.
CntptyCreditRisk$............  Counterparty credit risk capital in
                                dollars.
CntptyExposurebps............  Counterparty exposure in basis points.
CntptyExposure$..............  Counterparty exposure in dollars.
CntptyShare%.................  Counterparty quota share in percent.
CombRiskMult.................  Combined risk multiplier.
CreditAndMarketRiskCapReq$...  Credit and market risk capital
                                requirement in dollars for a CMBS.
CreditAndMarketRiskCapReq$\CM  Credit and market risk capital
 BS.                            requirement in dollars in aggregate for
                                all CMBSs.
CreditRiskCapReq$............  Credit risk capital requirement in
                                dollars.
CreditRiskCapReqbps..........  Credit risk capital requirement in basis
                                points.
CRTLT%.......................  CRT loss timing factor in percent.
DTCH.........................  Detachment point for a tranche.
GCBufferReq$.................  Going-concern buffer requirement in
                                dollars.
GCBufferReq$\CMBS............  Going-concern buffer requirement in
                                dollars in aggregate for all CMBS.
GCBufferReq$\MD..............  Going-concern buffer requirement in
                                dollars for all municipal debt.
GCBufferReq$\MFMBS...........  Going-concern buffer requirement in
                                dollars for all multifamily MBS.
GCBufferReq$\MFWL............  Going-concern buffer requirement in
                                dollars for all multifamily family whole
                                loans and guarantees.
GCBufferReq$\SFREV...........  Going-concern buffer requirement in
                                dollars for all reverse mortgage loans
                                and securities.
GCBufferReq$\SFWL............  Going-concern buffer requirement in
                                aggregate for all single-family whole
                                loans and guarantees.
GrossCreditRiskCapReqbps.....  Gross credit risk capital requirement in
                                basis points.
KG...........................  The weighted-average total capital
                                requirement of the underlying exposures
                                in a PLS.
LenderCapital$...............  The portion of capital associated with
                                the lender's exposure.
LS%..........................  Contractual loss sharing risk relief
                                percentage for single-family CRTs.
LSTCRCbps....................  Tranche credit risk capital associated
                                with the single-family CRT loss sharing
                                transaction, in basis points.
MarketRiskCapReqbps..........  Market risk capital requirement in basis
                                points.
MarketRiskCapReq$............  Market risk capital requirement in
                                dollars.
MarketRiskCapReq$\MD.........  Market risk capital requirement in
                                dollars for all municipal debt.
MarketRiskCapReq$\MFMBS......  Market risk capital requirement in
                                dollars for all multifamily MBS.
MarketRiskCapReq$\MFWL.......  Market risk capital requirement in
                                dollars for all multifamily whole loans
                                and guarantees.
MarketRiskCapReq$\SFREV......  Market risk capital requirement in
                                dollars for all reverse mortgage loans
                                and securities.

[[Page 33393]]

 
MarketRiskCapReq$\SFWL.......  Market risk capital requirement in
                                dollars for all single-family whole
                                loans and guarantees.
MF_LS%.......................  Lender loss sharing risk relief
                                percentage for multifamily CRTs.
MF_MTLS%.....................  Multiple tranche loss sharing risk relief
                                percentage for multifamily CRTs.
MF_S%........................  Capital market risk relief percentage for
                                multifamily CRTs.
MTLSTCRCbps..................  Capital relief from multiple tranche loss
                                sharing.
NetCreditRiskCapReqbps.......  Net credit risk capital requirement in
                                basis points.
NetCreditRiskCapReq$.........  Net credit risk capital requirement in
                                dollars.
NetCreditRiskCapReq$\MFWL....  Net credit risk capital requirement in
                                dollars for all multifamily whole loans
                                and guarantees.
NetCreditRiskCapReq$\SFWL....  Net credit risk capital requirement in
                                dollars for all single-family whole
                                loans and guarantees.
OperationalRiskCapReqbps.....  Operational risk capital requirement in
                                basis points.
OperationalRiskCapReq$.......  Operational risk capital requirement in
                                dollars.
OperationalRiskCapReq$\MD....  Operational risk capital requirement in
                                dollars for all municipal debt.
OperationalRiskCapReq$\MFMBS.  Operational risk capital requirement in
                                dollars for all multifamily MBS.
OperationalRiskCapReq$\MFWL..  Operational risk capital requirement in
                                dollars for all multifamily whole loans
                                and guarantees.
OperationalRiskCapReq$\SFREV.  Operational risk capital requirement in
                                dollars for all reverse mortgage loans
                                and securities.
OperationalRiskCapReq$\SFWL..  Operational risk capital requirement in
                                dollars for all single-family whole
                                loans and guarantees.
PGCRCbps.....................  Credit risk capital on a pool group of
                                whole loans and guarantees underlying a
                                CRT, in basis points.
PGELbps......................  Lifetime net expected losses on a pool
                                group of whole loans and guarantees
                                underlying the CRT, in basis points.
PGCapReliefbps...............  Capital relief for a pool group in basis
                                points.
PGUPB$.......................  A pool group's aggregate unpaid principal
                                balance.
RiskBasedCapReq$\CMBS........  Risk-based capital requirement in dollars
                                in aggregate for all CMBS.
RiskBasedCapReq$\DTA.........  Risk-based capital requirement in dollars
                                in aggregate for all deferred tax
                                assets.
RiskBasedCapReq$\MD..........  Risk-based capital requirement in dollars
                                for all municipal debt.
RiskBasedCapReq$\MFWLGS......  Risk-based capital requirement in dollars
                                for all multifamily whole loans,
                                guarantees, and related securities.
RiskBasedCapReq$\PLS.........  Risk-based capital requirement in dollars
                                for all single-family PLS.
RiskBasedCapReq$\SFREV.......  Risk-based capital requirement in dollars
                                for all reverse mortgage loans and
                                securities.
RiskBasedCapReq$\SFWLGS......  Risk-based capital requirement in dollars
                                for all single-family whole loans,
                                guarantees, and related securities.
RiskBasedCapReq$\TOTAL.......  Total risk-based capital requirement in
                                dollars.
RW...........................  Risk weight of a PLS.
SpreadDuration...............  Spread duration for a given loan or
                                security.
STCRCbps.....................  Capital relief from securitization.
TCRCbps......................  Tranche credit risk capital.
TotalCapRelief$\MFWL.........  Total capital relief across all
                                multifamily CRTs.
TotalCapRelief$\SFWL.........  Total capital relief across all single-
                                family CRTs.
TotalCombRiskMult............  Total combined risk multiplier.
UncapTotalCombRiskMult.......  Uncapped total combined risk multiplier.
UPB$.........................  Unpaid principal balance in dollars.
 

Sec.  1240.2   Board oversight of capital adequacy.

    (a) The board of directors of each Enterprise is responsible for 
overseeing that the Enterprise maintains capital at a level that is 
sufficient to ensure the continued financial viability of the 
Enterprise and that equals or exceeds the capital requirements 
contained in this part.
    (b) Nothing in this part permits or requires an Enterprise to 
engage in any activity that would otherwise be inconsistent with its 
Charter Act or the Safety and Soundness Act, 12 U.S.C. 4501 et seq.


Sec.  1240.3   Reporting procedure and timing.

    (a) Capital report. Each Enterprise shall file a capital report 
with the Director every quarter. The capital report must be made using 
the format separately provided to the Enterprises by FHFA. The report 
shall include, but not be limited to, the following:
    (1) The minimum capital requirement as calculated as of the end of 
each quarter.
    (2) The risk-based capital requirement as calculated as of the end 
of each quarter.
    (b) Timing. The capital report shall be submitted not later than 
sixty days after quarter end or at such other time as the Director 
requires.
    (c) Approval. The capital report must be approved by the Chief Risk 
Officer and the Chief Financial Officer of an Enterprise prior to 
submission to FHFA.
    (d) Adjustment. In the event an Enterprise makes an adjustment to 
its financial statements for a quarter or a date for which information 
was provided pursuant to this part, which would cause an adjustment to 
a capital report, an Enterprise shall file with the Director an amended 
capital report not later than 15 days after the date of such 
adjustment.
    (e) Additional reports. The Director may request from an Enterprise 
additional reports, information, and data, as appropriate, from time to 
time.


Sec.  1240.4   Risk-based capital requirement components.

    Each Enterprise shall maintain at all times total capital in an 
amount at least equal to the sum of the risk-based capital requirements 
for:
    (a) Single-family whole loans, guarantees, and related securities 
as provided in Sec. Sec.  1240.5 through 1240.23;
    (b) Private-label securities (PLS) as provided in Sec. Sec.  
1240.24 through 1240.29;
    (c) Multifamily loans, guarantees, and related securities as 
provided in Sec. Sec.  1240.30 through 1240.45;
    (d) Non-Enterprise and non-Ginnie Mae Commercial Mortgage Backed 
Securities (CMBS) as provided in Sec.  1240.46;
    (e) Other assets and exposures as provided in Sec.  1240.47; and

[[Page 33394]]

    (f) Unassigned activities as provided in Sec.  1240.48.


Sec.  1240.5   Single-family whole loans, guarantees, and related 
securities risk-based capital requirement components.

    The risk-based capital requirement for single-family whole loans, 
guarantees, and related securities is the cumulative total of the 
following capital requirements:
    (a) A credit risk capital requirement as provided in Sec. Sec.  
1240.6 through 1240.16;
    (b) A market risk capital requirement for single-family whole loans 
and securities having market exposure as provided in Sec. Sec.  1240.17 
through 1240.18;
    (c) An operational risk capital requirement as provided in 
Sec. Sec.  1240.19 through 1240.20; and
    (d) A going-concern buffer requirement as provided in Sec. Sec.  
1240.21 through 1240.22.


Sec.  1240.6   Single-family whole loans and guarantees credit risk 
capital requirement methodology.

    (a) The methodology for calculating the credit risk capital 
requirement for single-family whole loans and guarantees uses tables to 
determine the base credit risk capital requirement, risk factor 
multipliers to adjust the base credit risk capital requirement for risk 
factor variations not captured in the base credit risk requirement, 
credit enhancement multipliers to reduce the capital requirement due to 
the presence of loan-level credit enhancement, and reductions in credit 
enhancement benefits due to counterparty risk. The methodology also 
provides for a reduction in the credit risk capital requirement for 
single-family whole loans and guarantees subject to credit risk 
transfer (CRT) transactions.
    (b) The steps for calculating the credit risk capital requirement 
for single-family whole loans and guarantees are as follows:
    (1) Identify the loan data needed for the calculation of the 
single-family whole loans and guarantees credit risk capital 
requirement.
    (2) Assign each loan to a single-family loan segment, as specified 
in Sec.  1240.7.
    (3) Determine the base credit risk capital requirement using the 
assigned single-family loan segment, as specified in Sec.  1240.8.
    (4) Determine the loan's total combined risk multiplier using the 
assigned single-family loan segment and risk factor multipliers, as 
specified in Sec.  1240.9.
    (5) Determine the loan's gross credit risk capital requirement 
using the total combined risk multiplier and the base capital, as 
specified in Sec.  1240.10.
    (6) Determine the reduction of capital from the gross credit risk 
capital requirement due to the presence of loan-level credit 
enhancement benefit, as specified in Sec.  1240.11.
    (7) Determine the reduction in loan-level credit enhancement 
benefit due to counterparty risk for the credit enhancement 
counterparty, as specified in Sec.  1240.12.
    (8) Determine the net credit risk capital requirement by reducing 
for the loan-level credit enhancement benefit due to counterparty risk 
for the credit enhancement counterparty, as specified in Sec.  1240.13.
    (9) Determine the aggregate net credit risk capital requirement for 
single-family whole loans and guarantees, as specified in Sec.  
1240.13.
    (10) Determine the capital relief from single-family CRTs, as 
specified in Sec. Sec.  1240.14 through 1240.16.
    (c) The credit risk capital requirement applies to any Enterprise 
conventional single-family whole loan and guarantee with exposure to 
credit risk.
    (d) Table 1 to part 1240 lists the data needed for the calculation 
of the single-family whole loans and guarantees credit risk capital 
requirement. Table 1 contains variable names, definitions, acceptable 
values, and treatments for missing or unacceptable values.

                   Table 1 to Part 1240--Single-Family Whole Loans and Guarantees Data Inputs
----------------------------------------------------------------------------------------------------------------
                                                                                           Treatment of missing
              Variable                     Definition/logic          Acceptable values    or unacceptable values
----------------------------------------------------------------------------------------------------------------
Back-end Debt-to-Income (DTI) Ratio  DTI is calculated as the     0% < DTI < 100%.......  Set to 42%.
                                      ratio of debt to income.
                                      Debt consists of the
                                      borrowers' monthly
                                      mortgage payments for
                                      principal and interest,
                                      mortgage-related
                                      obligations (property
                                      taxes, Home Owners
                                      Association (HOA) fees,
                                      condominium fees,
                                      cooperative fees, and
                                      insurance), current debt
                                      obligations, alimony, and
                                      child support. Income
                                      consists of the total pre-
                                      tax monthly income of all
                                      borrowers as determined at
                                      the time of origination.
                                     DTI at origination should
                                      be used for Home
                                      Affordable Modification
                                      Program (HAMP) and HAMP-
                                      like modifications.
Loan-level Credit Enhancement Types  Types of loan-level credit   Participation           Not Applicable.
                                      enhancement that provide     Agreements,
                                      credit protection to the     Repurchase or
                                      Enterprises for              replacement
                                      conventional single-family   Agreements, Recourse
                                      whole loans. Loan-level      and Indemnification
                                      credit enhancements are      Agreements, Mortgage
                                      typically used to meet the   Insurance, Not
                                      Charter requirements for     Applicable.
                                      loans with LTVs greater
                                      than 80%.
Streamlined Refi...................  Indicator for a loan that    Yes, No...............  No.
                                      was refinanced through one
                                      of an Enterprise's
                                      streamlined refinance
                                      programs, including, for
                                      example Home Affordable
                                      Refinance Program (HARP),
                                      Relief Refi and Refi-Plus.
Interest-Only (IO).................  A loan that requires only    Yes, No...............  Yes.
                                      payment of interest
                                      without any principal
                                      amortization during all or
                                      part of the loan term.

[[Page 33395]]

 
Loan Age...........................  Loan age is calculated as    0 months <= Loan Age    If the difference in
                                      the difference in months     <= 500 months.          months between the
                                      between the origination                              origination month and
                                      month and the month of the                           the month of the
                                      reporting date.                                      reporting date is
                                                                                           negative, set Loan
                                                                                           Age to 0. If the
                                                                                           difference is greater
                                                                                           than 500, set Loan
                                                                                           Age to 500.
Loan Documentation Level...........  The level of income          No Documentation, Low   Set to No
                                      documentation used to        Documentation, Full     Documentation.
                                      underwrite the loan.         Documentation.
Loan Purpose.......................  Purpose of the mortgage at   Purchase, Cashout       Set to Cashout
                                      origination.                 Refinance, Rate/Term    Refinance.
                                                                   Refinance.
Mark-to-Market Loan-to-Value         MTMLTV is calculated as....  0% < MTMLTV <= 300%...  Set MTMLTV to 300% if
 (MTMLTV) Ratio.                     UPB/((UPBOriginal/OLTV) x                             any of the following
                                      house_price_growth_factor).                          conditions apply:
                                     Special instructions for                             <bullet> The
                                      determining                                          calculated MTMLTV is
                                      house_price_growth_factor:.                          less than or equal to
                                     <bullet> Use the FHFA                                 0.
                                      Purchase Only State-Level                           <bullet> The
                                      House Price Index (HPI).                             calculated MTMLTV is
                                     <bullet> Use the USA HPI                              greater than 300%.
                                      for Puerto Rico and the
                                      Virgin Islands.
                                      <bullet> Use the Hawaii
                                      HPI for Guam..
                                     <bullet> If a loan was
                                      originated before 1991,
                                      use an Enterprise's
                                      proprietary HPI.
                                     <bullet> If an HPI series
                                      ends before the reporting
                                      date, keep the HPI series
                                      constant (flat line).
                                     <bullet> Use geometric
                                      interpolation to convert
                                      quarterly HPI data to
                                      monthly HPI data.
                                     <bullet>
                                      house_price_growth_factor
                                      is equal to the ratio of
                                      HPI at the reporting date
                                      (or latest available HPI)
                                      to HPI at the loan's
                                      origination date.
Market Value.......................  The value of the loan used   ......................  Set to UPB.
                                      to inform an Enterprise's
                                      fair value disclosures.
Months since Last Delinquency......  For re-performing loans,     Non-negative integer..  Set to 0.
                                      months since last
                                      delinquency is calculated
                                      as the difference in
                                      months between the ending
                                      date of the last
                                      delinquency period and the
                                      reporting date.
Months since Last Modification.....  For modified loans, months   Non-negative integer..  Set to 0.
                                      since last modification is
                                      calculated as the
                                      difference in months
                                      between the effective date
                                      of the modification and
                                      the reporting date.
Mortgage Insurance (MI)              Mortgage insurance is        Cancellable, Non-       Set to Cancellable.
 Cancellation Feature.                cancellable if coverage      Cancellable.
                                      can or will terminate
                                      before the maturity date
                                      of the mortgage (e.g., due
                                      to the Homeowners
                                      Protection Act).
                                     Mortgage insurance is non-
                                      cancellable if the
                                      coverage extends to the
                                      maturity of the mortgage.
MI Coverage Percent................  The percentage of the sum    0% <= MI Coverage       Set to 0%.
                                      of UPB, lost interest and    Percent <= 100%.
                                      foreclosure costs used to
                                      determine the benefit
                                      under a mortgage insurance
                                      policy.
Number of Borrowers................  The number of borrowers on   Multiple borrowers,     Set to One borrower.
                                      the mortgage note.           One borrower.
Number of Missed Payments..........  For delinquent loans, the    Non-negative integer..  Set to 7.
                                      number of missed payments,
                                      measured in months, as of
                                      the reporting date.
Occupancy Type.....................  The borrowers' intended use  Investment, Owner       Set to Investment.
                                      of the property.             Occupied, Second Home.
Original Credit Score..............  The borrower's credit score  300 <= Original Credit  Set to 600.
                                      as of the origination date   Score <= 850.
                                     If there are credit scores
                                      from multiple credit
                                      repositories for a
                                      borrower, use the
                                      following logic to
                                      determine a single
                                      Original Credit Score:.
                                       <bullet> If there are
                                     credit scores from two
                                     repositories, take the
                                     lower credit score
                                       <bullet> If there are
                                     credit scores from three
                                     repositories, use the
                                     middle credit score
                                       <bullet> If there are
                                     credit scores from three
                                     repositories and two of the
                                     credit scores are
                                     identical, use the
                                     identical credit score
                                     If there are multiple
                                      borrowers, use the
                                      following logic to
                                      determine a single
                                      Original Credit Score:
                                       <bullet> Using the logic
                                     above, determine a single
                                     credit score for each
                                     borrower

[[Page 33396]]

 
                                       <bullet> Select the
                                     lowest single credit score
                                     across all borrowers
Original Loan-to-Value (OLTV)......  OLTV is calculated as the    0% < OLTV <= 300%.....  Set OLTV to 300% if
                                      ratio between the original                           any of the following
                                      loan amount and the lesser                           conditions apply:
                                      of appraised value or sale                          <bullet> The
                                      price.                                               calculated OLTV is
                                                                                           less than or equal to
                                                                                           0.
                                                                                          <bullet> The
                                                                                           calculated OLTV is
                                                                                           greater than 300%.
                                                                                          <bullet> Both the
                                                                                           sales price and
                                                                                           appraised value are
                                                                                           missing.
Origination Channel................  Source of the loan.........  Retail, Third-Party     Set to TPO.
                                                                   Origination (TPO)
                                                                   (includes Broker and
                                                                   Correspondent).
Payment Change from Modification...  The change in the monthly    -80% < Payment Change   Set to 0% if missing.
                                      payment resulting from a     from Modification <     If the change in the
                                      permanent loan               50%.                    monthly payment
                                      modification.                                        resulting from a
                                     Payment Change from                                   permanent loan
                                      Modification is calculated                           modification is
                                      as:.                                                 greater than or equal
                                     100% * (post-modification                             to 50%, set Payment
                                      monthly payment/pre-                                 Change from
                                      modification monthly                                 Modification to 49%.
                                      payment-1).                                          If the change in the
                                     If the modified loan has an                           monthly payment
                                      adjustable or step rate                              resulting from a
                                      feature, the post-                                   permanent loan
                                      modification monthly                                 modification less
                                      payment is calculated                                than or equal to -
                                      using the initial modified                           80%, set Payment
                                      rate. The Payment Change                             Change from
                                      from Modification is not                             Modification to -79%.
                                      updated subsequent to any
                                      rate resets.
Previous Maximum Delinquency.......  For re-performing loans,     Non-negative integer..  Set to 6 months.
                                      the maximum number of
                                      months delinquent at any
                                      point in the prior 36
                                      months.
Product Type.......................  The mortgage product type    FRM 30, FRM 20, FRM     Set to ARM 1/1.
                                      as of the loan's             15, ARM 1/1.
                                      origination date.
                                     Fixed rate loans are
                                      classified according to
                                      their original
                                      amortization terms:
                                     FRM30 = Fixed Rate with
                                      amortization term > 309
                                      months and <= 429 months.
                                     FRM20 = Fixed Rate with
                                      amortization term > 189
                                      months and <= 309 months.
                                     FRM15 = Fixed Rate with
                                      amortization term <= 189
                                      months.
                                     The ARM 1/1 is an
                                      adjustable-rate mortgage
                                      (ARM) where the rate and
                                      the payment adjust
                                      annually.
                                     Product types other than
                                      FRM30, FRM20, FRM15 or ARM
                                      1/1 should be assigned to
                                      FRM30.
                                     Use the post-modification
                                      product type for modified
                                      loans.
Property Type......................  The physical structure of    Single-family 1-Unit,   Set to Single-family 2-
                                      the property.                Single-family 2-4       4 Units.
                                                                   Units, Condominium,
                                                                   Manufactured Home.
Refreshed Credit Score.............  The borrower's credit score  300 <= Refreshed        If a refreshed credit
                                      as of the reporting date.    Credit Score <= 850.    score is not
                                      If there are credit scores                           available, use the
                                      from multiple credit                                 most recent score. If
                                      repositories for a                                   no credit score is
                                      borrower, use the                                    available set the
                                      following logic to                                   credit score to 600.
                                      determine a single
                                      Refreshed Credit Score:
                                     <bullet> If there are
                                      credit scores from two
                                      repositories, take the
                                      lower credit score.
                                        <bullet> If there are
                                         credit scores from
                                         three repositories, use
                                         the middle credit score.
                                        <bullet> If there are
                                         credit scores from
                                         three repositories and
                                         two of the credit
                                         scores are identical,
                                         use the identical
                                         credit score.
                                     If there are multiple
                                      borrowers, use the
                                      following logic to
                                      determine a single
                                      Refreshed Credit Score:
                                        <bullet> Using the logic
                                         above, determine a
                                         single credit score for
                                         each borrower.
                                        <bullet> Select the
                                         lowest single credit
                                         score across all
                                         borrowers.

[[Page 33397]]

 
Subordination (Second lien Original  The ratio of the original    0% <= Subordination <=  Set to 80% if greater
 LTV).                                loan amount of the second    80%.                    than 80%.
                                      lien to the lesser of
                                      appraised value or sale
                                      price.
Unpaid Principal Balance (UPB).....  The remaining unpaid         $0 < UPB < $2,000,000.  Set to $45,000.
                                      principal balance on the
                                      loan as of the reporting
                                      date.
----------------------------------------------------------------------------------------------------------------

    (e) Table 2 to part 1240 lists the data needed to determine the 
CPHaircut used in the calculation of the single-family whole loans and 
guarantees credit risk capital requirement. The table contains variable 
names, definitions, acceptable values, and treatments for missing or 
unacceptable values.

                           Table 2 to Part 1240--Data Inputs for CPHaircut Calculation
----------------------------------------------------------------------------------------------------------------
                                                                                        Treatment of missing or
            Variable                 Definition/logic          Acceptable values          unacceptable values
----------------------------------------------------------------------------------------------------------------
Counterparty Name..............  The name of the
                                  counterparty.
Counterparty Rating............  Counterparty rating as   1.........................  Set to 8.
                                  defined in Table 3. An  2.........................
                                  Enterprise should       3.........................
                                  assign the              4.........................
                                  counterparty rating     5.........................
                                  that most closely       6.........................
                                  aligns to the           7.........................
                                  assessment of the
                                  counterparty from the
                                  Enterprise's internal
                                  counterparty risk
                                  framework.
                                                          8.........................
Mortgage Concentration Risk....  An Enterprise's          High, Not High............  Set to High.
                                  assessment of a
                                  counterparty's
                                  exposure to mortgage
                                  credit risk relative
                                  to the counterparty's
                                  exposure to other
                                  lines of business.
                                  This assessment may
                                  include both
                                  quantitative and
                                  qualitative factors.
----------------------------------------------------------------------------------------------------------------

    (f) An Enterprise must have internally generated ratings for 
counterparties. The internally generated ratings must be converted into 
the counterparty ratings provided in Table 3 to part 1240. Table 3 
provides the counterparty financial strength ratings and descriptions 
used in this part to determine CPHaircuts.

      Table 3 to Part 1240--Counterparty Financial Strength Ratings
------------------------------------------------------------------------
         Counterparty rating                      Description
------------------------------------------------------------------------
1....................................  The counterparty is exceptionally
                                        strong financially. The
                                        counterparty is expected to meet
                                        its obligations under
                                        foreseeable adverse events.
2....................................  The counterparty is very strong
                                        financially. There is negligible
                                        risk the counterparty may not be
                                        able to meet all of its
                                        obligations under foreseeable
                                        adverse events.
3....................................  The counterparty is strong
                                        financially. There is a slight
                                        risk the counterparty may not be
                                        able to meet all of its
                                        obligations under foreseeable
                                        adverse events.
4....................................  The counterparty is financially
                                        adequate Foreseeable adverse
                                        events will have a greater
                                        impact on `4' rated
                                        counterparties than higher rated
                                        counterparties.
5....................................  The counterparty is financially
                                        questionable. The counterparty
                                        may not meet its obligations
                                        under foreseeable adverse
                                        events.
6....................................  The counterparty is financially
                                        weak. The counterparty is not
                                        expected to meet its obligations
                                        under foreseeable adverse
                                        events.
7....................................  The counterparty is financially
                                        extremely weak. The
                                        counterparty's ability to meet
                                        its obligations is questionable.
8....................................  The counterparty is in default on
                                        an obligation or is under
                                        regulatory supervision.
------------------------------------------------------------------------

    (g) Table 4 to part 1240 provides the data inputs supplied by FHFA 
needed for the calculation of the single-family whole loans and 
guarantees credit risk capital requirement.

           Table 4 to Part 1240--Data Inputs Provided by FHFA
------------------------------------------------------------------------
                    Item                             Description
------------------------------------------------------------------------
Cohort Burnout.............................  A table containing
                                              historical origination
                                              dates and the number of
                                              opportunities, measured in
                                              months, a loan originated
                                              on a given origination
                                              date has had to refinance
                                              to a lower interest rate.
                                             For a given origination
                                              month/year cohort, an
                                              opportunity to refinance
                                              occurs when the Primary
                                              Mortgage Market Survey
                                              (PMMS) rate for the cohort
                                              exceeds the prevailing
                                              PMMS rate by more than 50
                                              basis points.

[[Page 33398]]

 
                                             Cohort Burnout is
                                              designated as ``No
                                              Burnout'' if the cohort
                                              has not experienced a
                                              refinance opportunity.
                                              Cohort Burnout is ``Low''
                                              if the cumulative
                                              occurrence of refinance
                                              opportunities is between 1
                                              month and 12 months.
                                              Cohort Burnout is
                                              ``Medium'' if the
                                              cumulative occurrence of
                                              refinance opportunities is
                                              between 13 months and 24
                                              months. Cohort Burnout is
                                              ``High'' if the cumulative
                                              occurrence of refinance
                                              opportunities exceeds 24
                                              months.
House Price Index (HPI)....................  FHFA's seasonally adjusted
                                              purchase-only HPI by
                                              state.
------------------------------------------------------------------------

Sec.  1240.7   Loan segments for single-family whole loans and 
guarantees credit risk capital requirement.

    (a) An Enterprise must assign each single-family whole loan and 
guarantee with exposure to credit risk to a single-family loan segment. 
The single-family loan segments are: New Origination Loan; Performing 
Seasoned Loan; Non-Modified Re-Performing Loan (RPL); Modified RPL; 
Non-Performing Loan (NPL).
    (b) The definitions for the single-family loan segments are 
provided in Table 5 to part 1240.

    Table 5 to Part 1240--Definitions for Single-Family Loan Segments
------------------------------------------------------------------------
                  Segment                             Definition
------------------------------------------------------------------------
New Origination Loan.......................  <bullet> Loan age less than
                                              or equal to 5 months, and
                                             <bullet> Never delinquent.
                                             Excludes:
                                             <bullet> Streamlined Refi
                                              loans.
Performing Seasoned Loan...................  <bullet> Loan age greater
                                              than 5 months, and
                                             <bullet> Never delinquent.
                                             Also includes:
                                             <bullet> Newly funded
                                              Streamlined Refi loans.
                                             <bullet> Loans that were
                                              delinquent, were not
                                              modified or put on a
                                              repayment plan, and have
                                              made 48 consecutive
                                              payments as of the
                                              reporting date.
                                             <bullet> Loans that were
                                              delinquent, were not
                                              modified or put on a
                                              repayment plan, and have
                                              made 36 consecutive
                                              payments as of the
                                              reporting date and had no
                                              more than one missed
                                              payment in the 12 months
                                              preceding the 36 months.
Non-Modified RPL...........................  <bullet> Performing,
                                             <bullet> Had a prior
                                              delinquency, and
                                             <bullet> Never modified or
                                              entered a repayment plan.
                                             Excludes:
                                             <bullet> Loans that have
                                              made 48 consecutive
                                              payments as of the
                                              reporting date.
                                             <bullet> Loans that have
                                              made 36 consecutive
                                              payments as of the
                                              reporting date and had no
                                              more than one missed
                                              payment in the 12 months
                                              preceding the 36 months.
Modified RPL...............................  <bullet> Performing and
                                             <bullet> Modified or
                                              entered into a repayment
                                              plan.
NPL........................................  <bullet> Delinquent.
------------------------------------------------------------------------

    (c) The process for assigning a loan to the appropriate single-
family loan segment is presented in the decision tree shown in Figure 1 
to part 1240.

[[Page 33399]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.015

Sec.  1240.8  Base credit risk capital requirement for single-family 
whole loans and guarantees.

    An Enterprise must determine the base credit risk capital 
requirement in basis points (BaseCapitalbps) for a loan by using the 
Table that corresponds to a particular loan segment.
    (a) Single-family New Origination Loan BaseCapitalbps is shown in 
Table 6 to part 1240. For each loan classified as a New Origination 
Loan, BaseCapitalbps is the value in the cell in Table 6 determined 
using the original credit score and OLTV of the loan.
BILLING CODE 8070-01-P

[[Page 33400]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.016

    (b) Single-family Performing Seasoned Loan BaseCapitalbps is shown 
in Table 7 to part 1240. For each loan classified as a Performing 
Seasoned Loan, BaseCapitalbps is the value in the cell in Table 7 
determined using the refreshed credit score and MTMLTV of the loan.

[[Page 33401]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.017

    (c) Single-family Non-Modified RPL BaseCapitalbps is shown in Table 
8 to part 1240. For each loan classified as a Non-Modified RPL, 
BaseCapitalbps is the value in the cell in Table 8 determined using the 
Months Since Last Delinquency and the MTMLTV of the loan.

[[Page 33402]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.018

    (d) Single-family Modified RPL BaseCapitalbps is shown in Table 9 
to part 1240. For each loan classified as a Modified RPL, 
BaseCapitalbps is the value in the cell in Table 9 determined using the 
minimum of the Months Since Last Modification and Months Since Last 
Delinquency and the MTMLTV of the loan.

[[Page 33403]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.019

    (e) Single-family NPL BaseCapitalbps is shown in Table 10 to part 
1240. For each loan classified as an NPL, BaseCapitalbps is the value 
in the cell in Table 10 determined using the Number of Missed Payments 
and the MTMLTV of the loan.

[[Page 33404]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.020

BILLING CODE 8070-01-C


Sec.  1240.9   Risk multipliers for single-family whole loans and 
guarantees.

    (a) Risk multiplier values increase or decrease the credit risk 
capital requirement for single-family whole loans and guarantees based 
on a loan's assigned loan segment and risk characteristics. The Single-
family Risk Multipliers are presented in Table 11 to part 1240.
    (b) The steps for calculating the total combined risk multiplier 
(TotalCombRiskMult) are as follows:
    (1) Determine the appropriate risk multipliers values from Table 11 
based on the loan's characteristics and assigned loan segment.
    (2) Apply the appropriate formula as set forth in paragraph (c) of 
this section to calculate the uncapped total combined risk multiplier 
(UncapTotalCombRiskMult).
    (3) For high LTV loans, the combined risk multiplier is subject to 
a cap. For those loans, apply the calculation set forth in paragraph 
(d) of this section, to determine TotalCombRiskMult.
    (4) For loans not subject to the cap, TotalCombRiskMult will equal 
UncapTotalCombRiskMult.

[[Page 33405]]



                                                  Table 11 to Part 1240--Single-Family Risk Multipliers
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          Risk multipliers by single-family loan segment
                                                                         -------------------------------------------------------------------------------
                Risk factor                        Value or range               New
                                                                            origination     Performing     Non-modified    Modified RPL         NPL
                                                                               loan        seasoned loan        RPL
--------------------------------------------------------------------------------------------------------------------------------------------------------
Loan Purpose..............................  Purchase....................             1.0             1.0             1.0             1.0  ..............
                                            Cashout Refinance...........             1.4             1.4             1.4             1.4  ..............
                                            Rate/Term Refinance.........             1.3             1.3             1.2             1.3  ..............
                                            Other.......................             1.0             1.0             1.0             1.0  ..............
Occupancy Type............................  Owner Occupied or Second                 1.0             1.0             1.0             1.0             1.0
                                             Home.
                                            Investment..................             1.2             1.2             1.5             1.3             1.2
Property Type.............................  1-Unit......................             1.0             1.0             1.0             1.0             1.0
                                            2-4 Unit....................             1.4             1.4             1.4             1.3             1.1
                                            Condominium.................             1.1             1.1             1.0             1.0             1.0
                                            Manufactured Home...........             1.3             1.3             1.8             1.6             1.2
Number of Borrowers.......................  Multiple borrowers..........             1.0             1.0             1.0             1.0             1.0
                                            One borrower................             1.5             1.5             1.4             1.4             1.1
Third-Party Origination Channel...........  Non-TPO.....................             1.0             1.0             1.0             1.0             1.0
                                            TPO.........................             1.1             1.1             1.1             1.1             1.0
DTI.......................................  DTI <= 25%..................             0.8             0.8             0.9             0.9  ..............
                                            25% < DTI <= 40%............             1.0             1.0             1.0             1.0  ..............
                                            DTI > 40%...................             1.2             1.2             1.2             1.1  ..............
Product Type..............................  FRM 30 year.................             1.0             1.0             1.0             1.0             1.0
                                            ARM 1/1.....................             1.7             1.7             1.1             1.0             1.1
                                            FRM 15 year.................             0.3             0.3             0.3             0.5             0.5
                                            FRM 20 year.................             0.6             0.6             0.6             0.5             0.8
Loan Size.................................  UPB <= $50,000..............             2.0             2.0             1.5             1.5             1.9
                                            $50,000 < UPB <= $100,000...             1.4             1.4             1.5             1.5             1.4
                                            UPB > $100,000..............             1.0             1.0             1.0             1.0             1.0
Subordination (OTLV x Second Lien)........  No subordination............             1.0             1.0             1.0             1.0  ..............
                                            30% < OLTV <= 60% and 0% <               1.1             1.1             0.8             1.0  ..............
                                             subordination <= 5%.
                                            30% < OLTV <= 60% and                    1.5             1.5             1.1             1.2  ..............
                                             subordination > 5%.
                                            OLTV > 60% and 0% <                      1.1             1.1             1.2             1.1  ..............
                                             subordination <= 5%.
                                            OLTV > 60% and subordination             1.4             1.4             1.5             1.3  ..............
                                             > 5%.
Loan Age..................................  Loan Age <= 24 months.......  ..............             1.0  ..............  ..............  ..............
                                            24 months < Loan Age <= 36    ..............            0.95  ..............  ..............  ..............
                                             months.
                                            36 months < Loan Age <= 60    ..............            0.80  ..............  ..............  ..............
                                             months.
                                            Loan Age > 60 months........  ..............            0.75  ..............  ..............  ..............
Cohort Burnout............................  No Burnout..................  ..............             1.0  ..............  ..............  ..............
                                            Low.........................  ..............             1.2  ..............  ..............  ..............
                                            Medium......................  ..............             1.3  ..............  ..............  ..............
                                            High........................  ..............             1.4  ..............  ..............  ..............
Interest-Only (IO)........................  No IO.......................  ..............             1.0             1.0             1.0  ..............
                                            Yes IO......................  ..............             1.6             1.4             1.1  ..............
Loan Documentation Level..................  Full Documentation..........  ..............             1.0             1.0             1.0  ..............
                                            No Documentation or Low                                  1.3             1.3             1.2  ..............
                                             Documentation.
Streamlined Refi..........................  No..........................  ..............             1.0             1.0             1.0  ..............
                                            Yes.........................  ..............             1.0             1.2             1.1  ..............
Refreshed Credit Score for RPLs...........  Refreshed Credit Score < 620  ..............  ..............             1.6             1.4  ..............
                                            620 <= Refreshed Credit       ..............  ..............             1.3             1.2  ..............
                                             Score < 640.
                                            640 <= Refreshed Credit       ..............  ..............             1.2             1.1  ..............
                                             Score < 660.
                                            660 <= Refreshed Credit       ..............  ..............             1.0             1.0  ..............
                                             Score < 700.
                                            700 <= Refreshed Credit       ..............  ..............             0.7             0.8  ..............
                                             Score < 720.
                                            720 <= Refreshed Credit       ..............  ..............             0.6             0.7  ..............
                                             Score < 740.
                                            740 <= Refreshed Credit       ..............  ..............             0.5             0.6  ..............
                                             Score < 760.
                                            760 <= Refreshed Credit       ..............  ..............             0.4             0.5  ..............
                                             Score < 780.

[[Page 33406]]

 
                                            Refreshed Credit Score >=     ..............  ..............             0.3             0.4  ..............
                                             780.
Payment change from modification..........  Payment Change >= 0%........  ..............  ..............  ..............             1.1  ..............
                                            -20% <= Payment Change < 0%.  ..............  ..............  ..............             1.0  ..............
                                            -30% <= Payment Change < -    ..............  ..............  ..............             0.9  ..............
                                             20%.
                                            Payment Change < -30%.......  ..............  ..............  ..............             0.8  ..............
Previous Maximum Delinquency (in the last   0-1 Months..................  ..............  ..............             1.0             1.0  ..............
 36 months).                                2-3 Months..................  ..............  ..............             1.2             1.1  ..............
                                            4-5 Months..................  ..............  ..............             1.3             1.1  ..............
                                            6+ Months...................  ..............  ..............             1.5             1.1  ..............
Refreshed Credit Score for NPLs...........  Refreshed Credit Score < 580  ..............  ..............  ..............  ..............             1.2
                                            580 <= Refreshed Credit       ..............  ..............  ..............  ..............             1.1
                                             Score < 640.
                                            640 <= Refreshed Credit       ..............  ..............  ..............  ..............             1.0
                                             Score < 700.
                                            700 <= Refreshed Credit       ..............  ..............  ..............  ..............             0.9
                                             Score < 720.
                                            720 <= Refreshed Credit       ..............  ..............  ..............  ..............             0.8
                                             Score < 760.
                                            760 <= Refreshed Credit       ..............  ..............  ..............  ..............             0.7
                                             Score < 780.
                                            Refreshed Credit Score >=     ..............  ..............  ..............  ..............             0.5
                                             780.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (c) The following loan characteristics risk multiplier calculations 
are to be used for each respective loan segment to determine the 
UncapTotalCombRiskMult:
    (1) For each loan classified as a Single-family New Origination 
Loan determine the risk multiplier values associated with the relevant 
risk factors from Table 11 and apply the following formula to calculate 
UncapTotalCombRiskMult:

UncapTotalCombRiskMult = Loan Purpose Multiplier x Occupancy Type 
Multiplier x Property Type Multiplier x Number of Borrowers Multiplier 
x Third-Party Origination Channel Multiplier x Back-End Debt-to-Income 
Multiplier x Product Type Multiplier x Loan Size Multiplier x 
Subordination Multiplier.

    (2) For each loan classified as a Seasoned Performing Loan 
determine the risk multiplier values associated with the relevant risk 
factors from Table 11 and apply the following formula to calculate 
UncapTotalCombRiskMult:

UncapTotalCombRiskMult = Loan Purpose Multiplier x Occupancy Type 
Multiplier x Property Type Multiplier x Number of Borrowers Multiplier 
x Third-Party Origination Channel Multiplier x Back-End Debt-to-Income 
Multiplier x Product Type Multiplier x Loan Size Multiplier x 
Subordination Multiplier x Loan Age Multiplier x Cohort Burnout 
Multiplier x Interest-Only Multiplier x Loan Documentation Level 
Multiplier x Streamlined Refi Multiplier.

    (3) For each loan classified as a Non-Modified RPL determine the 
risk multiplier values associated with the relevant risk factors from 
Table 11 and apply the following formula to calculate 
UncapTotalCombRiskMult:

UncapTotalCombRiskMult = Loan Purpose Multiplier x Occupancy Type 
Multiplier x Property Type Multiplier x Number of Borrowers Multiplier 
x Third-Party Origination Channel Multiplier x Back-End Debt-to-Income 
Multiplier x Product Type Multiplier x Loan Size Multiplier x 
Subordination Multiplier x Loan Age Multiplier x Interest-Only 
Multiplier x Loan Documentation Level Multiplier x Streamlined Refi 
Multiplier x Refreshed Credit Score for RPLs Multiplier x Previous 
Maximum Delinquency Multiplier.

    (4) For each loan classified as a Modified RPL determine the risk 
multiplier values associated with the relevant risk factors from Table 
11 and apply the following formula to calculate UncapTotalCombRiskMult:

UncapTotalCombRiskMult = Loan Purpose Multiplier x Occupancy Type 
Multiplier x Property Type Multiplier x Number of Borrowers Multiplier 
x Third-Party Origination Channel Multiplier x Back-End Debt-to-Income 
Multiplier x Product Type Multiplier x Loan Size Multiplier x 
Subordination Multiplier x Loan Age Multiplier x Interest-Only 
Multiplier x Loan Documentation Level Multiplier x Streamlined Refi 
Multiplier x Refreshed Credit Score for RPLs Multiplier x Payment 
change from modification Multiplier x Previous Maximum Delinquency 
Multiplier.

    (5) For each loan classified as an NPL determine the risk 
multiplier values associated with the relevant risk factors from Table 
11 and apply the following formula to calculate UncapTotalCombRiskMult:

UncapTotalCombRiskMult = Occupancy Type Multiplier x Property Type 
Multiplier x Number of Borrowers Multiplier x Product Type Multiplier x 
Loan Size Multiplier x Prior Maximum Delinquency Multiplier x Refreshed 
Credit Score for NPLs Multiplier.


[[Page 33407]]


    (d) TotalCombRiskMult is calculated as described below:
    (1) For high LTV loans, the combined risk multiplier is subject to 
a cap. If the OLTV for a loan classified as a New Origination Loan or 
the MTMLTV for a loan classified in any other loan segment is greater 
than 95%, TotalCombRiskMult is capped at 3.0 according to the following 
formula:

TotalCombRiskMult = MIN(UncapTotalCombRiskMult, 3.0)

    (2) If the OLTV for a loan classified as a New Origination Loan or 
the MTMLTV for a loan classified in any other loan segment is less than 
or equal to 95%, then TotalCombRiskMult equals UncapTotalCombRiskMult.


Sec.  1240.10   Gross credit risk capital requirement for single-family 
whole loans and guarantees.

    An Enterprise must determine the gross credit risk capital 
requirement in basis points (GrossCreditRiskCapReqbps) for a loan by 
taking the product of BaseCapitalbps and TotalCombRiskMult, where the 
product is subject to a limit of 3,000 basis points according to the 
following formula:

GrossCreditRiskCapReqbps = MIN(BaseCapitalbps x TotalCombRiskMult, 
3,000)


Sec.  1240.11   Loan-level credit enhancement impact on gross credit 
risk capital requirement.

    (a) Loan-level credit enhancement comprises participation 
agreements, repurchase or replacement agreements, recourse and 
indemnification agreements and mortgage insurance.
    (b) Loan-level credit enhancement reduces an Enterprise's gross 
credit risk capital requirement. Only loans covered by a loan-level 
credit enhancement as of the reporting date receives a loan-level 
credit enhancement benefit.
    (c) An Enterprise must determine the credit enhancement multiplier 
(CEMultiplier) using Tables 12, 13, 14, 15, and 16, and the special 
provisions in paragraphs (d) through (i) of this section.
    (1) Table 12 to part 1240 shows CEMultipliers for New Origination 
Loan, Performing Seasoned Loan, and Non-Modified RPL loan segments 
where MI Cancellation Feature is set to Non-Cancellable.

     Table 12 to Part 1240--CEMultipliers for New Origination Loan,
  Performing Seasoned Loan, and Non-Modified RPL Loan Segments When MI
             Cancellation Feature Is Set to Non-Cancellable
------------------------------------------------------------------------
Amortization term/coverage type     Coverage category      CEMultiplier
------------------------------------------------------------------------
15/20 Year Amortizing Loan with  80% < OLTV <= 85% and             0.846
 Guide-level Coverage.            MI Coverage Percent =            0.701
                                  6%.
                                 85% < OLTV <= 90% and
                                  MI Coverage Percent =
                                  12%.
                                 90% < OLTV <= 95% and             0.408
                                  MI Coverage Percent =
                                  25%.
                                 95% < OLTV <= 97% and             0.226
                                  MI Coverage Percent =
                                  35%.
                                 OLTV > 97% and MI                 0.184
                                  Coverage Percent = 35%.
30 Year Amortizing Loan with     80% < OLTV <= 85% and             0.706
 Guide-level Coverage.            MI Coverage Percent =            0.407
                                  12%.
                                 85% < OLTV <= 90% and
                                  MI Coverage Percent =
                                  25%.
                                 90% < OLTV <= 95% and             0.312
                                  MI Coverage Percent =
                                  30%.
                                 95% < OLTV <= 97% and             0.230
                                  MI Coverage Percent =
                                  35%.
                                 OLTV > 97% and MI                 0.188
                                  Coverage Percent = 35%.
15/20 Year Amortizing Loan with  80% < OLTV <= 85% and             0.846
 Charter-level Coverage.          MI Coverage Percent =            0.701
                                  6%.
                                 85% < OLTV <= 90% and
                                  MI Coverage Percent =
                                  12%.
                                 90% < OLTV <= 95% and             0.612
                                  MI Coverage Percent =
                                  16%.
                                 95% < OLTV <= 97% and             0.570
                                  MI Coverage Percent =
                                  18%.
                                 OLTV > 97% and MI                 0.535
                                  Coverage Percent = 20%.
30 Year Amortizing Loan with     80% < OLTV <= 85% and             0.850
 Charter-level Coverage.          MI Coverage Percent =            0.713
                                  6%.
                                 85% < OLTV <= 90% and
                                  MI Coverage Percent =
                                  12%.
                                 90% < OLTV <= 95% and             0.627
                                  MI Coverage Percent =
                                  16%.
                                 95% < OLTV <= 97% and             0.590
                                  MI Coverage Percent =
                                  18%.
                                 OLTV > 97% and MI                 0.558
                                  Coverage Percent = 20%.
------------------------------------------------------------------------

    (2) Table 13 to part 1240 shows CEMultipliers for New Origination 
Loan, Performing Seasoned Loan, and Non-Modified RPL loan segments 
where MI Cancellation Feature is set to Cancellable.
BILLING CODE 8070-01-P

[[Page 33408]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.021

    (3) Table 14 to part 1240 shows CEMultipliers for the Modified RPL 
loan segment with 30-Year Post-Modification Amortization when MI 
Cancellation Feature is set to Cancellable. The 30 Year and 15/20 Year 
Amortizing Loan characteristics refer to pre-modification original 
amortization terms.

[[Page 33409]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.023

    (4) Table 15 to part 1240 shows CEMultipliers for Modified RPL with 
40-Year Post-Modification Amortization when MI Cancellation Feature is 
set to Cancellable. The 30 Year and 15/20 Year Amortizing Loan 
characteristics refer to pre-modification original amortization terms.

[[Page 33410]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.024

BILLING CODE 8070-01-C
    (5) Table 16 to part 1240 shows CEMultipliers for NPLs.

[[Page 33411]]



              Table 16 to Part 1240--CEMultipliers for NPLs
------------------------------------------------------------------------
  Original amortization term/
         coverage type              Coverage category      CEMultiplier
------------------------------------------------------------------------
15/20 Year Amortizing Loan with  80% < OLTV <= 85% and             0.893
 Guide-level Coverage.            MI Coverage Percent =
                                  6%.
                                 85% < OLTV <= 90% and             0.803
                                  MI Coverage Percent =
                                  12%.
                                 90% < OLTV <= 95% and             0.597
                                  MI Coverage Percent =
                                  25%.
                                 95% < OLTV <= 97% and             0.478
                                  MI Coverage Percent =
                                  35%.
                                 OLTV > 97% and MI                 0.461
                                  Coverage Percent = 35%.
30 Year Amortizing Loan with     80% < OLTV <= 85% and             0.813
 Guide-level Coverage.            MI Coverage Percent =
                                  12%.
                                 85% < OLTV <= 90% and             0.618
                                  MI Coverage Percent =
                                  25%.
                                 90% < OLTV <= 95% and             0.530
                                  MI Coverage Percent =
                                  30%.
                                 95% < OLTV <= 97% and             0.490
                                  MI Coverage Percent =
                                  35%.
                                 OLTV > 97% and MI                 0.505
                                  Coverage Percent = 35%.
15/20 Year Amortizing Loan with  80% < OLTV <= 85% and             0.893
 Charter-level Coverage.          MI Coverage Percent =
                                  6%.
                                 85% < OLTV <= 90% and             0.803
                                  MI Coverage Percent =
                                  12%.
                                 90% < OLTV <= 95% and             0.775
                                  MI Coverage Percent =
                                  16%.
                                 95% < OLTV <= 97% and             0.678
                                  MI Coverage Percent =
                                  18%.
                                 OLTV > 97% and MI                 0.663
                                  Coverage Percent = 20%.
30 Year Amortizing Loan with     80% < OLTV <= 85% and             0.902
 Charter-level Coverage.          MI Coverage Percent =
                                  6%.
                                 85% < OLTV <= 90% and             0.835
                                  MI Coverage Percent =
                                  12%.
                                 90% < OLTV <= 95% and             0.787
                                  MI Coverage Percent =
                                  16%.
                                 95% < OLTV <= 97% and             0.765
                                  MI Coverage Percent =
                                  18%.
                                 OLTV > 97% and MI                 0.760
                                  Coverage Percent = 20%.
------------------------------------------------------------------------

    (d) CEMultipliers calculated from Tables 12, 13, 14, 15 and 16 to 
part 1240 may be subject to special provisions depending on the 
characteristics of the single-family whole loan and guarantee.
    (1) If a loan is covered by MI and its OLTV is less than or equal 
to 80 percent, use the CEMultiplier associated with the appropriate 80 
to 85 percent OLTV cell.
    (2) If a loan has an interest-only feature and its MI Cancellation 
Feature is set to Cancellable, treat the MI as non-cancellable when 
selecting the appropriate CEMultiplier.
    (3) If a loan has an MI Coverage Percent between the MI Coverage 
Percentages for Charter-level Coverage and Guide-level Coverage, use 
linear interpolation to determine the CEMultiplier.
    (4) If a loan has an MI Coverage Percent that is less than the MI 
Coverage Percent for Charter-Level Coverage, use linear interpolation 
between a hypothetical policy with zero coverage and a CEMultiplier of 
one, and the Charter-level Coverage to determine the CEMultiplier.
    (5) If a loan has an MI Coverage Percent that is greater than the 
Guide-level Coverage, set the CEMultiplier equal to the CEMultiplier 
for the Guide-level Coverage.
    (e) CEMultiplier for full repurchase or replacement agreements is 
set to 0.0.
    (f) CEMultiplier for full recourse and indemnification agreements 
is set to 0.0.
    (g) CEMultiplier for partial repurchase or replacement agreements 
shall be calculated using the methodology for calculating capital 
relief as provided in Sec.  1240.14.
    (h) CEMultiplier for partial recourse and indemnification 
agreements shall be calculated using the methodology for calculating 
capital relief as provided in Sec.  1240.14.
    (i) CEMultiplier for participation agreements is set to 1.0.


Sec.  1240.12   Counterparty Haircut for single-family whole loans and 
guarantees.

    (a) The amount by which credit enhancement lowers the 
GrossCreditRiskCapReqbps for single-family whole loans and guarantees 
must be reduced to account for the risk that the counterparty is unable 
to pay claims.
    (b) An Enterprise shall determine the CPHaircut using Table 17 to 
part 1240.

                              Table 17 to Part 1240--CPHaircut by Rating, Mortgage Concentration Risk, Segment, and Product
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Mortgage concentration risk: Not high             Mortgage concentration risk: High
                                                         -----------------------------------------------------------------------------------------------
                                                           New originations, performing                    New originations, performing
                   Counterparty rating                        seasoned, and RPLs (%)                          seasoned, and RPLs (%)
                                                         --------------------------------    NPLs (%)    --------------------------------    NPLs (%)
                                                              30 Year       20/15 Year                        30 Year       20/15 Year
                                                              product         product                         product         product
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................................             1.8             1.3             0.6             2.8             2.0             0.9
2.......................................................             4.5             3.5             2.0             7.3             5.6             3.2
3.......................................................             5.2             4.0             2.4             8.3             6.4             3.9
4.......................................................            11.4             9.5             6.9            17.2            14.3            10.4
5.......................................................            14.8            12.7             9.9            20.9            18.0            14.0
6.......................................................            21.2            19.1            16.4            26.8            24.2            20.8
7.......................................................            40.0            38.2            35.7            43.7            41.7            39.0
8.......................................................            47.6            46.6            45.3            47.6            46.6            45.3
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 33412]]

Sec.  1240.13   Net credit risk capital requirement for single-family 
whole loans and guarantees.

    (a) The net credit risk capital requirement for a single-family 
whole loan and guarantee is the GrossCreditRiskCapReqbps adjusted for 
the loan-level credit enhancement benefit and CPHaircut.
    (b) For a loan with loan-level credit enhancement, an Enterprise 
shall determine the net credit risk capital requirement in basis points 
(NetCreditRiskCapReqbps) using the following equation:
NetCreditRiskCapReqbps = GrossCreditRiskCapReqbps x (1-(1-CEMultiplier) 
x (1-CPHaircut))

    (c) For a loan without loan-level credit enhancement, an Enterprise 
shall determine the net credit risk capital requirement in basis points 
(NetCreditRiskCapReqbps) using the following equation:

NetCreditRiskCapReqbps = GrossCreditRiskCapReqbps

    (d) An Enterprise shall determine the net credit risk capital 
requirement in dollars (NetCreditRiskCapReq$) using the following 
equation:

NetCreditRiskCapReq$ = UPB x NetCreditRiskCapReqbps/10,000

    (e) The aggregate net credit risk capital requirement for all 
single-family whole loans and guarantees (NetCreditRiskCapReq$\SFWL) is 
the sum of each loan's NetCreditRiskCapReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.027

Sec.  1240.14   Single-family credit risk transfer capital relief for 
single-family whole loans and guarantees.

    (a) A single-family credit risk transfer (``single-family CRT'') is 
a credit risk transfer where the whole loans and guarantees underlying 
the CRT, or referenced by the CRT, are single-family whole loans and 
guarantees. Single-family CRTs may reduce NetCreditRiskCapReq$\SFWL. 
The reduction is called capital relief. The methodology for calculating 
capital relief combines aggregate credit risk capital requirements and 
expected losses on the single-family whole loans and guarantees 
underlying or referenced by the single-family CRT, tranche structure, 
ownership, loss timing, and counterparty credit risk. The methodology 
is provided in Sec.  1240.15.
    (b) The steps for calculating capital relief from a single-family 
CRT are as follows:
    (1) Identify the single-family whole loans and guarantees 
underlying or referenced by the CRT.
    (2) Calculate the aggregate net credit risk capital requirements 
and expected losses on the single-family whole loans and guarantees 
underlying or referenced by the CRT.
    (3) Distribute the aggregate net credit risk capital requirements 
and expected losses across the tranches of the CRT so that relatively 
higher capital requirements are allocated to the more risky junior 
tranches that are the first to absorb losses, and relatively lower 
requirements are allocated to the more senior tranches.
    (4) Identify capital relief, adjusting for an Enterprise's retained 
tranche interests.
    (5) Adjust capital relief for loss timing and counterparty credit 
risk.
    (6) Calculate total capital relief by adding up capital relief for 
each tranche in the CRT.


Sec.  1240.15   Calculation of capital relief from a single-family CRT.

    (a) To calculate capital relief from a single-family CRT, an 
Enterprise must have data that enables it to assign accurately the 
parameters described in paragraphs (b) and (c) of this section.
    (1) Data used to assign the parameters must be the most currently 
available data. If the contracts governing the single-family CRT 
require payments on a monthly or quarterly basis, the data used to 
assign the parameters must be no more than 91 calendar days old.
    (2) If an Enterprise does not have the data to assign the 
parameters described in paragraphs (b) and (c) of this section, then an 
Enterprise must treat the single-family CRT as if no capital relief had 
occurred.
    (b) To calculate capital relief from a single-family CRT, an 
Enterprise must have accurate data on the following set of inputs:
    (1) CRT tranche attachment point. An Enterprise must have accurate 
information on each tranche's attachment point (ATCH) in the single-
family CRT. For a given tranche, ATCH represents the threshold at which 
credit losses of principal will first be allocated. For a given 
tranche, ATCH equals 10,000 multiplied by the ratio of the current 
dollar amount of underlying subordinated tranches relative to the 
current dollar amount of all tranches. ATCH is expressed in basis 
points or as a value between zero and 10,000.
    (2) CRT tranche detachment point. An Enterprise must have accurate 
information on each tranche's detachment point (DTCH) in the single-
family CRT. For a given tranche, DTCH represents the threshold at which 
credit losses of principal would result in total loss of principal. For 
a given tranche, DTCH equals the sum of the tranche's ATCH and 10,000 
multiplied by the ratio of the current dollar amount of tranches that 
are pari passu with the tranche (that is, have equal seniority with 
respect to credit risk) to the current dollar amount of all tranches. 
DTCH is expressed in basis points or as a value between zero and 
10,000.
    (3) Capital markets risk relief percentage by tranche. An 
Enterprise must have accurate information on each tranche's capital 
markets risk relief percentage (CM<not-eq>) in the single-family CRT. 
For a given tranche, CM<not-eq> is the percentage of the tranche sold 
in the capital markets. CM<not-eq> is expressed as a value between 0% 
and 100%.
    (4) Contractual loss sharing risk relief percentage by tranche. An 
Enterprise must have accurate information on each tranche's contractual 
loss sharing risk relief percentage (LS<not-eq>) in the single-family 
CRT. For a given tranche, LS<not-eq> is the percentage of the tranche 
that is either insured, reinsured, or afforded coverage through lender 
reimbursement of credit losses of principal. LS<not-eq> is expressed as 
a value between 0% and 100%.
    (5) Credit risk capital on the underlying reference pool. The 
Enterprises must have accurate data on each pool group's credit risk 
capital (PGCRCbps) in the single-family CRT. PGCRCbps is expressed in 
basis points or as a value between zero and 10,000. For each pool group 
of single-family whole loans and guarantees in the single-family CRT, 
PGCRCbps is calculated in one of the following ways:
    (i) For single-family CRTs where the contractual terms of the 
single-family CRT indicate that the single-family CRT will not convey 
the counterparty credit risk associated with loan-level credit 
enhancement on the single-family whole loans and guarantees underlying 
the single-family CRT, then PGCRCbps is calculated using the aggregate 
net credit risk capital requirement for all single-family whole loans 
and guarantees

[[Page 33413]]

underlying the given pool group assuming a 0% CPHaircut as follows:
[GRAPHIC] [TIFF OMITTED] TP17JY18.028

    (ii) For all other single-family CRTs, PGCRCbps is calculated using 
the aggregate net credit risk capital requirement for all single-family 
whole loans and guarantees underlying the given pool group as follows:
[GRAPHIC] [TIFF OMITTED] TP17JY18.029

    (6) CRT expected losses. An Enterprise must have accurate data on 
total lifetime net expected credit risk losses (PGELbps) on the whole 
single-family loans and guarantees underlying each pool group in the 
single-family CRT. PGELbps shall be calculated internally by an 
Enterprise. PGELbps does not include the operational risk capital 
requirement or going-concern buffer. PGELbps is expressed in basis 
points or as a value between zero and 10,000. For each pool group, 
PGELbps is calculated in one of the following ways:
    (i) For single-family CRTs where the contractual terms of the 
single-family CRT indicate that the single-family CRT will not convey 
the counterparty credit risk associated with MI on the single-family 
whole loans and guarantees underlying the single-family CRT, PGELbps 
reflects an Enterprise's internal calculation of aggregate lifetime net 
expected credit risk losses on all single-family whole loans and 
guarantees underlying the given pool group while assuming no 
counterparty haircuts on MI.
    (ii) For all other single-family CRTs, PGELbps reflects an 
Enterprise's internal calculation of aggregate lifetime net expected 
credit risk losses on all single-family whole loans and guarantees 
underlying the given pool group.
    (7) Counterparty collateral on loss sharing transactions. An 
Enterprise must have accurate data on the dollar amounts of 
counterparty collateral (CntptyCollat$) for each counterparty by 
tranche and pool group from a single-family CRT involving contractual 
loss sharing. For a given counterparty, tranche, and pool group, 
CntptyCollat$ is the dollar amount of collateral to fulfill the 
counterparty's trust funding obligation for loss sharing. CntptyCollat$ 
is expressed in dollar terms as a value greater than or equal to $0.
    (8) Counterparty quota shares on loss sharing transactions. An 
Enterprise must have accurate information on counterparty quota shares 
on contractual loss sharing transactions for each counterparty by 
tranche and pool group. For a given counterparty, tranche, and pool 
group, the counterparty share is the percentage of LS<not-eq> that is 
insured, reinsured, or afforded coverage through lender reimbursement 
of credit losses of principal by the given counterparty 
(CntptyShare<not-eq>). CntptyShare<not-eq> is expressed as a value 
between 0% and 100%.
    (9) Counterparty ratings on loss sharing transactions. An 
Enterprise must have internally generated ratings for counterparties on 
contractual loss sharing transactions. The internally generated ratings 
must be converted into counterparty financial strength ratings 
consistent with Table 3: Counterparty Financial Strength Ratings, of 
this part.
    (10) Counterparty mortgage concentration risk on loss sharing 
transactions. An Enterprise must have an internally generated indicator 
for mortgage concentration risk for the counterparties on contractual 
loss sharing transactions. The internally generated indicator for 
mortgage concentration risk must be converted into ratings that reflect 
the following categories: High and Not High. An Enterprise should 
designate counterparties with a significant concentration of mortgage 
credit as High. An Enterprise should designate all other counterparties 
as Not High.
    (11) CRT loss timing factor. (i) Table 18 to part 1240 sets forth 
loss timing factors which account for maturity differences between the 
CRT and the CRT's underlying single-family whole loans and guarantees. 
Maturity differences arise when the CRT's maturity date arises before 
the maturity dates on the underlying single-family whole loans and 
guarantees. The loss timing factors reflect estimates of the cumulative 
percentages of lifetime losses by the number of months between the 
CRT's original closing date (or effective date) and the maturity date 
on the CRT such that CRTs with longer maturities cover more lifetime 
losses. The loss timing factors also vary by original amortization term 
and OLTVs on the underlying single-family whole loans and guarantees.
    (ii) Using Table 18 to Part 1240, the Enterprises must calculate a 
single-family CRT loss timing factor (CRTLT<not-eq>) for each pool 
group. CRTLT<not-eq> is expressed as a value between 0% and 100%. To 
calculate the CRTLT<not-eq>, an Enterprise must have the following 
information by pool group at the time of deal issuance:
    (A) CRT's original closing date (or effective date) and the 
maturity date on the CRT;
    (B) UPB share of single-family whole loans and guarantees in the 
pool group that have original amortization terms of less than or equal 
to 189 months (CRTF15<not-eq>); and
    (C) UPB share of single-family whole loans and guarantees in the 
pool group that have original amortization terms greater than 189 
months and OLTVs of less than or equal to 80 percent 
(CRT80NotF15<not-eq>).
    (iii) An Enterprise must use the following method to calculate 
CRTLT<not-eq> for each pool group:
    (A) Calculate CRT months to maturity (CRTMthstoMaturity) using one 
of the following methods:
    (1) For single-family CRTs with reimbursement based upon occurrence 
or resolution of delinquency, CRTMthstoMaturity is the difference 
between the CRT's maturity date and original closing date, except for 
the following:
    (i) If the coverage based upon delinquency is between 1 and 3 
months, add 24 months to the difference between the CRT's maturity date 
and original closing date.
    (ii) If the coverage based upon delinquency is between 4 and 6 
months,

[[Page 33414]]

add 18 months to the difference between the CRT's maturity date and 
original closing date.
    (2) For all other single-family CRTs, CRTMthstoMaturity is the 
difference between the CRT's maturity date and original closing date.
    (B) If CRTMthstoMaturity is a multiple of 12, then an Enterprise 
must use the first column of Table 18 to identify the row matching 
CRTMthstoMaturity and take a weighted average of the three loss timing 
factors in columns 2, 3, and 4 as follows:

CRTLT<not-eq> = (CRTLT15 * CRTF15<not-eq>) + (CRTLT80Not15 * 
CRT80NotF15<not-eq>) + (CRTLTGT80Not15 * (1 - CRT80NotF15<not-eq> - 
CRTF15<not-eq>))

    (C) If CRTMthstoMaturity is not a multiple of 12, an Enterprise 
must use the first column of Table 18 to identify the two rows that are 
closest to CRTMthstoMaturity and take a weighted average between the 
two rows of loss timing factors using linear interpolation, where the 
weights reflect CRTMthstoMaturity.

                          Table 18 to Part 1240--Single-Family CRT Loss Timing Factors
----------------------------------------------------------------------------------------------------------------
                                                           CRT loss timing factors
                            ------------------------------------------------------------------------------------
  CRTMthstoMaturity: (#1)                                  CRTLT80Not15: (#3) CRTLT   CRTLTGT80Not15: (#4) CRTLT
 Number of months from the     CRTLT15: (#2)  CRTLT for    for pool groups backed by   for pool groups backed by
    single-family CRT's         pool groups backed by      single-family whole loans   single-family whole loans
 original closing date (or    single-family whole loans       and guarantees with         and guarantees with
   effective date) to the        and guarantees with         original amortization       original amortization
  maturity date on the CRT   original amortization terms    terms > 189 months and      terms > 189 months and
                                  < = 189 months (%)           OLTVs < = 80 (%)             OLTVs > 80 (%)
----------------------------------------------------------------------------------------------------------------
                     0                            0                           0                           0
                    12                            1                           0                           0
                    24                            6                           3                           2
                    36                           21                          13                          11
                    48                           44                          31                          26
                    60                           66                          49                          43
                    72                           82                          65                          58
                    84                           90                          74                          68
                    96                           94                          80                          76
                   108                           96                          85                          81
                   120                           98                          88                          86
                   132                           99                          91                          89
                   144                           99                          93                          92
                   156                          100                          94                          94
                   168                          100                          96                          95
                   180                          100                          96                          96
                   192                          100                          97                          97
                   204                          100                          98                          98
                   216                          100                          98                          98
                   228                          100                          98                          98
                   240                          100                          99                          99
                   252                          100                          99                          99
                   264                          100                          99                          99
                   276                          100                          99                          99
                   288                          100                          99                          99
                   300                          100                         100                         100
                   312                          100                         100                         100
                   324                          100                         100                         100
                   336                          100                         100                         100
                   348                          100                         100                         100
                   360                          100                         100                         100
----------------------------------------------------------------------------------------------------------------

    (12) Aggregate unpaid principal balance by pool group. An 
Enterprise must have accurate information on each pool group's 
aggregate unpaid principal balance (PGUPB$).
    (c) An Enterprise must use the parameters described in paragraph 
(b) of this section to calculate CRT capital relief, by single-family 
CRT pool group, using the following steps:
    (1) An Enterprise must distribute PGCRCbps, by pool group, to the 
tranches of the CRT, while controlling for PGELbps. For a given pool 
group and tranche, tranche credit risk capital (TCRCbps) is as follows:
[GRAPHIC] [TIFF OMITTED] TP17JY18.030


TCRCbps takes values between 0 and 10,000. TCRCbps must be calculated 
for each tranche in the single-family CRT.
    (2) For each pool group and tranche in a single-family CRT, an 
Enterprise must use the following formulae to identify the capital 
relief from the capital markets (CMTCRCbps) and loss sharing 
(LSTCRCbps) portions of the single-family CRT:

CMTCRCbps = CM<not-eq> * TCRCbps * CRTLT<not-eq>
LSTCRCbps = LS<not-eq> * TCRCbps * CRTLT<not-eq>


CMTCRCbps and LSTCRCbps are expressed in basis points and take values 
between 0 and 10,000.
    (3) For loss sharing transactions, an Enterprise must determine the 
uncollateralized counterparty exposure

[[Page 33415]]

(CntptyExposurebps) and counterparty credit risk (CntptyCreditRiskbps) 
by pool group and tranche.
    (i) For each pool group, tranche and counterparty, an Enterprise 
must use the following formula to calculate CntptyExposurebps:
[GRAPHIC] [TIFF OMITTED] TP17JY18.031


CntptyExposurebps takes values between 0 and 10,000.
    (ii) For each pool group, tranche and counterparty, an Enterprise 
must determine CntptyCreditRiskbps. An Enterprise must use its 
internally generated counterparty ratings converted into the 
counterparty ratings provided in Table 3: Counterparty Financial 
Strength Ratings, and its internally generated indicator for mortgage 
concentration risk converted into ratings that reflect High and Not 
High together with the CPHaircuts for New Origination Loan, Performing 
Seasoned Loan, and RPLs from Table 17: CPHaircut by Rating, Mortgage 
Concentration Risk, Segment, and Product, and the following formula to 
calculate CntptyCreditRiskbps:

CntptyCreditRiskbps = CntptyExposurebps * CPHaircut


CntptyCreditRiskbps takes values between 0 and 10,000.

    (4) For each pool group in the single-family CRT, an Enterprise 
must calculate aggregate capital relief (PGCapReliefbps) across all 
tranches and counterparties associated with the given pool group using 
the following formula:
[GRAPHIC] [TIFF OMITTED] TP17JY18.032

    (5) An Enterprise must calculate total capital relief in dollars 
for the entire single-family CRT (CapRelief$) by adding up the capital 
relief in dollars from each pool group as follows:
[GRAPHIC] [TIFF OMITTED] TP17JY18.033

Sec.  1240.16   Calculation of total capital relief for single-family 
whole loans and guarantees.

    To calculate total capital relief across all single-family CRTs 
(TotalCapRelief$\SFWL), an Enterprise must aggregate capital relief 
using the following:
[GRAPHIC] [TIFF OMITTED] TP17JY18.034

Sec.  1240.17   Market risk capital requirement for single-family whole 
loans.

    (a) Each single-family whole loan with market risk exposure is 
subject to the single-family whole loan market risk capital 
requirement. There is no market risk exposure for single-family 
guarantees. The market risk capital requirement for a single-family 
whole loan is limited to spread risk.
    (b) The single-family whole loan market risk capital requirement in 
dollars (MarketRiskCapReq$) utilizes different calculation 
methodologies based on the loan product type and performance status.
    (1) The dollar amount of the MarketRiskCapReq$ for an RPL or NPL is 
calculated as follows:

MarketRiskCapReq$ = Market Value x 0.0475

    (2) The dollar amount of the MarketRiskCapReq$ for a performing 
loan is determined by an Enterprise using its internal market risk 
model.
    (c) The aggregate market risk capital requirement for all single-
family whole loans (MarketRiskCapReq$\SFWL) is the sum of each loan's 
MarketRiskCapReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.035

Sec.  1240.18   Market risk capital requirement for single-family 
securities.

    (a) Enterprise- and Ginnie Mae-guaranteed single-family mortgage 
backed securities (MBSs) and collateralized mortgage obligations (CMOs) 
(collectively ``SFMBS'') held in an Enterprise's portfolio, have market 
risk exposure and are subject to a market risk capital requirement.
    (b) The dollar amount of the MarketRiskCapReq$ for SFMBS is 
determined by an Enterprise using its internal market risk model.
    (c) The aggregate market risk capital requirement for SFMBS 
(MarketRiskCapReq$\SFMBS) is the sum of each security's 
MarketRiskCapReq$:

[[Page 33416]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.036

Sec.  1240.19   Operational risk capital requirement for single-family 
whole loans and guarantees.

    (a) Each single-family whole loan and guarantee is subject to an 8 
basis point operational risk capital requirement 
(OperationalRiskCapReq$).
    (b) The dollar amount of the OperationalRiskCapReq$ is calculated 
as follows:
    (1) If the Enterprise holds only credit risk or both credit and 
market risk, the calculation is as follows:

OperationalRiskCapReq$ = UPB x 0.0008

    (2) Otherwise, if the Enterprise holds only market risk the 
calculation is as follows:

OperationalRiskCapReq$ = Market Value x 0.0008

    (c) The aggregate operational risk capital requirement for all 
single-family whole loans and guarantees (OperationalRiskCapReq$\SFWL) 
is the sum of each loan's OperationalRiskCapReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.037

Sec.  1240.20   Operational risk capital requirement for single-family 
securities.

    (a) Each SFMBS is subject to an 8 basis point operational risk 
capital requirement.
    (b) The operational risk capital requirement for SFMBS in dollar 
terms (OperationalRiskCapReq$) is calculated as follows:

OperationalRiskCapReq$ = SFMBS Market Value x 0.0008

    (c) The aggregate operational risk capital requirement for all 
SFMBS (OperationalRiskCapReq$\SFMBS) is the sum of each security's 
OperationalRiskCapReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.038

Sec.  1240.21   Going-concern buffer requirement for single-family 
whole loans and guarantees.

    (a) Each single-family whole loan and guarantee is subject to a 75 
basis point going-concern buffer requirement (GCBufferReq$).
    (b) The dollar amount of the GCBufferReq$ is calculated as follows:
    (1) If the Enterprise holds only credit risk or both credit and 
market risk, the calculation is as follows:

GCBufferReq$ = UPB x 0.0075

    (2) Otherwise, if the Enterprise holds only market risk the 
calculation is as follows:

GCBufferReq$ = Market Value x 0.0075

    (c) The aggregate going-concern buffer requirement for all single-
family whole loans and guarantees (GCBuffer Req$\SFWL) is the sum of 
each loan and guarantee's GCBufferReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.039

Sec.  1240.22   Going-concern buffer requirement for single-family 
securities.

    (a) Each SFMBS is subject to a 75 basis point going-concern buffer 
requirement.
    (b) The going-concern buffer requirement for an SFMBS in dollar 
terms (GCBufferReq$) is calculated as follows:

GCBufferReq$ = SFMBS Market Value x 0.0075

    (c) The aggregate going-concern buffer requirement for all SFMBS 
(GCBufferReq$\SFMBS) is the sum of each security's GCBufferReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.040

Sec.  1240.23   Aggregate risk-based capital requirement for single-
family whole loans, guarantees, and related securities.

    (a) As provided in Sec.  1240.5, the aggregate risk-based capital 
requirement for single-family whole loans, guarantees, and related 
securities is the cumulative total of: The aggregate net credit risk 
capital requirement; the aggregate market risk capital requirement for 
single-family whole loans and securities with market exposure; the 
aggregate operational risk capital requirement, and the aggregate 
going-concern buffer requirement, net of the total capital relief from 
single-family CRTs.
    (b) The aggregate risk-based capital requirement for all single-
family whole loans, guarantees, and related securities 
(RiskBasedCapReq$\SFWLGS) is calculated as follows:

RiskBasedCapReq$\SFWLGS = NetCreditRiskCapReq$\SFWL + 
MarketRiskCapReq$\SFWL + MarketRiskCapReq$\SFMBS + 
OperationalRiskCapReq$\SFWL + OperationalRiskCapReq$\SFMBS + 
GCBufferReq$\SFWL +

[[Page 33417]]

GCBufferReq$\SFMBS - TotalCapRelief$\SFWL


Sec.  1240.24   Private-label securities risk-based capital requirement 
components.

    The risk-based capital requirement for a private-label security 
(PLS), including PLS wraps, is the cumulative total of the following 
capital requirements:
    (a) A credit risk capital requirement as provided in Sec.  1240.25;
    (b) A market risk capital requirement as provided in Sec.  1240.26;
    (c) An operational risk capital requirement as provided in Sec.  
1240.27; and
    (d) A going-concern buffer requirement as provided in Sec.  
1240.28.


Sec.  1240.25   Credit risk capital requirement for a PLS.

    (a) Each PLS to which an Enterprise has credit risk exposure is 
subject to a credit risk capital requirement.
    (b) An Enterprise must calculate the credit risk capital 
requirement for a PLS by taking the following steps:
    (1) Calculate the risk weight (RW) of a PLS; and
    (2) Multiply the RW of a PLS by 8 percent.
    (c) To determine the RW for a PLS, an Enterprise must use the 
Simplified Supervisory Formula Approach (SSFA) as modified and provided 
below in this section (FHFA SSFA). FHFA SSFA provided in this section 
follows the SSFA provided in Sec.  217.43(a) through (d) of this title, 
as of the effective date of this part, with the following exceptions:
    (1) Excludes Sec.  217.43(b)(2)(v)(A) through (B) of this title:
    (2) Assigns the weighted-average total capital requirement of the 
underlying exposures K<INF>G</INF>;
    (3) Assigns the supervisory calibration parameter p for a PLS wrap;
    (4) Removes references to the nth to default credit derivatives; 
and
    (5) Substitutes references to a bank with references to an 
Enterprise.
    (d) To use FHFA SSFA to determine the risk weight for a PLS or PLS 
Wrap, also known as a securitization exposure, an Enterprise must have 
data that enables it to assign accurately the parameters described in 
paragraph (e) of this section. The data must be the most currently 
available data. If the contracts governing the underlying exposures of 
the securitization require payments on a monthly or quarterly basis, 
the data must be no more than 91 calendar days old. An Enterprise that 
does not have the appropriate data to assign the parameters described 
in paragraph (e) of this section must assign a risk weight of 1,250 
percent to the exposure.
    (e) To calculate the risk weight for a securitization exposure 
using FHFA SSFA, an Enterprise must have accurate data on the following 
five inputs to FHFA SSFA calculation:
    (1) K<INF>G</INF> is the weighted-average total capital requirement 
of the underlying exposures. K<INF>G</INF> is 8 percent.
    (2) Parameter W is expressed as a decimal value between zero and 
one. Parameter W is the ratio of the sum of the dollar amounts of any 
underlying exposures of the securitization to include collateral 
backing the PLS or PLS Wrap that meet any of the criteria as set forth 
in paragraphs (e)(2)(i) through (vi) of this section, to the balance, 
measured in dollars, of underlying exposures:
    (i) Ninety days or more past due;
    (ii) Subject to a bankruptcy or insolvency proceeding;
    (iii) In the process of foreclosure;
    (iv) Held as real estate owned;
    (v) Has contractually deferred payments for 90 days or more; or
    (vi) Is in default.
    (3) Parameter ATCH is the attachment point for the exposure, which 
represents the threshold at which credit losses will first be allocated 
to the exposure. Parameter ATCH equals the ratio of the current dollar 
amount of underlying exposures that are subordinated to the exposure of 
an Enterprise to the current dollar amount of underlying exposures. Any 
reserve account funded by the accumulated cash flows from the 
underlying exposures that is subordinated to an Enterprise's 
securitization exposure may be included in the calculation of parameter 
ATCH to the extent that cash is present in the account. Parameter ATCH 
is expressed as a decimal value between zero and one.
    (4) Parameter DTCH is the detachment point for the exposure, which 
represents the threshold at which credit losses of principal allocated 
to the exposure would result in a total loss of principal. Parameter 
DTCH equals parameter ATCH plus the ratio of the current dollar amount 
of the securitization exposures that are pari passu with the exposure 
(that is, have equal seniority with respect to credit risk) to the 
current dollar amount of the underlying exposures. Parameter DTCH is 
expressed as a decimal value between zero and one.
    (5) A supervisory calibration parameter, p, is equal to 0.5 for 
securitization exposures that are not resecuritization exposures and 
equal to 1.5 for resecuritization exposures. A PLS Wrap has a 
supervisory calibration parameter equal to the supervisory calibration 
parameter of the underlying PLS.
    (f) K<INF>G</INF> and W are used to calculate K<INF>A</INF>, the 
augmented value of K<INF>G</INF>, which reflects the observed credit 
quality of the underlying exposures. K<INF>A</INF> is defined in 
paragraph (g) of this section. The values of parameters ATCH and DTCH, 
relative to K<INF>A</INF>, determine the risk weight assigned to a 
securitization exposure as described in paragraph (g) of this section. 
The risk weight assigned to a securitization exposure, or portion of a 
securitization exposure, as appropriate, is the larger of the risk 
weight determined in accordance with paragraphs (f) or (g) of this 
section, and a risk weight of 20 percent.
    (1) When the detachment point, parameter DTCH, for a securitization 
exposure is less than or equal to K<INF>A</INF>, the exposure must be 
assigned a risk weight of 1,250 percent.
    (2) When the attachment point, parameter ATCH, for a securitization 
exposure is greater than or equal to K<INF>A</INF>, the Enterprise must 
calculate the risk weight in accordance with paragraph (g) of this 
section.
    (3) When ATCH is less than K<INF>A</INF> and DTCH is greater than 
K<INF>A</INF>, the risk weight is a weighted-average of 1,250 percent 
and 1,250 percent times KFHFA SSFA calculated in accordance with 
paragraph (g) of this section. For the purpose of this weighted-average 
calculation:
    (i) The weight assigned to 1,250 percent equals
    [GRAPHIC] [TIFF OMITTED] TP17JY18.041
    
    (ii) The weight assigned to 1,250 percent times KFHFA SSFA equals

[[Page 33418]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.042

    (iii) The risk weight will be set equal to
    [GRAPHIC] [TIFF OMITTED] TP17JY18.043
    
    (g) FHFA SSFA equation involves the following steps:
    (1) An Enterprise must define the following parameters:
    [GRAPHIC] [TIFF OMITTED] TP17JY18.044
    
    (2) An Enterprise must calculate KFHFA SSFA according to the 
following equation:
[GRAPHIC] [TIFF OMITTED] TP17JY18.045

    (3) The risk weight for the exposure (expressed as a percent) is 
equal to:


KFHFA SSFA * 1,250

    (h) Determine the credit risk capital requirement for a PLS in bps 
(CreditRiskCapReqbps) as follows:

CreditRiskCapReqbps = RW x 8% x 10,000

    (i) Determine the credit risk capital requirement for a PLS in 
dollar terms (CreditRiskCapReq$) as follows:

CreditRiskCapReq$ = Market Value x CreditRiskCapReqbps/10,000


Sec.  1240.26   Market risk capital requirement for a PLS.

    (a) Each PLS to which an Enterprise has market risk exposure is 
subject to a market risk capital requirement. The market risk capital 
requirement of a PLS wrap is zero as an Enterprise does not have market 
risk exposure to a PLS wrap.
    (b) The MarketRiskCapReqbps is equal to the product of the PLS 
spread duration as estimated by the Enterprise and a shock in the 
spread of the PLS of 265 bps as follows:

MarketRiskCapReqbps = 265bps x SpreadDuration

    (c) The MarketRiskCapReq$ is calculated as follows:

MarketRiskCapReq$ = Market Value x MarketRiskCapReqbps/10,000


Sec.  1240.27   Operational risk capital requirement for a PLS.

    (a) Each Enterprise PLS exposure is subject to an operational risk 
capital requirement.
    (b) The operational risk capital requirement for a PLS in dollar 
terms (OperationalRiskCapReq$) is calculated as follows:

OperationalRiskCapReq$ = Market Value x 0.0008


Sec.  1240.28   Going-concern buffer requirement for a PLS.

    (a) Each Enterprise PLS exposure is subject to a going-concern 
buffer requirement (GCBufferReq).
    (b) The GCBufferReq for a PLS in dollar terms (GCBufferReq$) is 
calculated as follows:

GCBufferReq$ = Market Value x 0.0075


Sec.  1240.29   Aggregate risk-based capital requirement for PLS.

    (a) The RiskBasedCapReq$ for a PLS is calculated as follows:

RiskBasedCapReq$ = CreditRiskCapReq$ + MarketRiskCapReq$ + 
OperationalRiskCapReq$ + GCBufferReq$

    (b) The RiskBasedCapReq$ for all Enterprise PLS 
(RiskBasedCapReq$\PLS) is calculated by aggregating RiskBasedCapReq$ 
for each PLS.
[GRAPHIC] [TIFF OMITTED] TP17JY18.046


[[Page 33419]]




Sec.  1240.30   Multifamily whole loans, guarantees, and related 
securities risk-based capital requirement components.

    The risk-based capital requirement for multifamily whole loans, 
guarantees, and related securities is the cumulative total of the 
following capital requirements:
    (a) A credit risk capital requirement, as provided in Sec. Sec.  
1240.31 through 1240.38;
    (b) A market risk capital requirement for multifamily whole loans 
and securities with market exposure, as provided in Sec. Sec.  1240.39 
through 1240.40;
    (c) An operational risk capital requirement, as provided in 
Sec. Sec.  1240.41 through 1240.42; and
    (d) A going-concern buffer requirement, as provided in Sec. Sec.  
1240.43 through 1240.44.


Sec.  1240.31   Multifamily whole loans and guarantees credit risk 
capital requirement methodology.

    (a) The methodology for calculating the credit risk capital 
requirement for a multifamily whole loan and guarantee uses tables to 
determine the base credit risk capital requirement and risk factor 
multipliers to adjust the base credit risk capital requirement for risk 
factor variations not captured in the base tables. The methodology also 
provides for a reduction in the credit risk capital requirement for 
multifamily whole loans and guarantees due to credit risk transfer 
transactions.
    (b) The steps for calculating the credit risk capital requirement 
for multifamily whole loans and guarantees are as follows:
    (1) Identify the loan data needed for the calculation of the 
multifamily whole loans and guarantees credit risk capital requirement.
    (2) Assign each multifamily whole loan and guarantee into a 
multifamily loan segment, as specified in Sec.  1240.32.
    (3) Determine BaseCapitalbps for each whole loan and guarantee 
using the loan's assigned multifamily loan segment and the appropriate 
segment-specific table, as specified in Sec.  1240.33.
    (4) Determine TotalCombRiskMult for each whole loan and guarantee 
based on the loan's assigned loan segment and risk characteristics, as 
specified in Sec.  1240.34.
    (5) Calculate GrossCreditRiskCap Reqbps for each whole loan and 
guarantee by multiplying BaseCapitalbps by TotalCombRiskMult, as 
specified in Sec.  1240.35.
    (6) Calculate NetCreditRiskCapReqbps as equal to 
GrossCreditRiskCapReqbps and determine the aggregate net credit risk 
capital requirement for multifamily whole loans and guarantees both as 
specified in Sec.  1240.36. For multifamily whole loans and guarantees, 
there is no charter required credit enhancement and 
NetCreditRiskCapReqbps is equal to GrossCreditRiskCapReqbps.
    (7) Determine the capital relief from multifamily CRTs, as 
specified in Sec. Sec.  1240.37 and 1240.38.
    (c) The credit risk capital requirement applies to any Enterprise 
multifamily whole loan or guarantee with exposure to credit risk.
    (d) Table 19 to part 1240 lists the loan data needed for the 
calculation of the multifamily whole loans and guarantees credit risk 
capital requirement. Table 19 contains variable names, definitions, 
acceptable values, and treatments for missing or unacceptable values.

                    Table 19 to Part 1240--Multifamily Whole Loans and Guarantees Data Inputs
----------------------------------------------------------------------------------------------------------------
                                                                                        Treatment of missing or
             Variable                    Definition/logic          Acceptable value        unacceptable value
----------------------------------------------------------------------------------------------------------------
Acquisition Debt-Service Coverage   The Debt-Service-Coverage   Greater than or equal  In a case where the
 Ratio (DSCR).                       Ratio is the ratio of Net   to 0.                  acquisition DSCR is not
                                     Operating Income (NOI) to                          available, use DSCR at
                                     the scheduled mortgage                             the time the loan was
                                     payment. If NOI is                                 underwritten as a
                                     unavailable, use Net Cash                          substitute. For a newly
                                     Flow (NCF).                                        acquired loan, the
                                    Acquisition DSCR is the                             origination DSCR can be
                                     DSCR reported at the time                          used as a proxy for the
                                     the loan is acquired.                              acquisition DSCR if the
                                    For interest-only loans,                            loan is acquired within
                                     use fully amortizing                               six months of
                                     acquisition DSCR when                              acquisition and an
                                     determining BaseCapital.                           acquisition DSCR record
                                                                                        is not available.
                                                                                       If missing, use
                                                                                        origination DSCR. If
                                                                                        origination DSCR is
                                                                                        missing, use DSCR at the
                                                                                        time the loan was
                                                                                        underwritten. If the
                                                                                        DSCR at the time the
                                                                                        loan is underwritten is
                                                                                        missing, use 1.00.
Acquisition LTV...................  Acquisition LTV is the LTV  Greater than or equal  Where the acquisition LTV
                                     at the time a loan is       to 0.                  is not available, use
                                     acquired.                                          the LTV at the time the
                                                                                        loan is underwritten. If
                                                                                        acquisition LTV is
                                                                                        missing, use origination
                                                                                        LTV. If origination LTV
                                                                                        is missing, use LTV at
                                                                                        the time the loan is
                                                                                        underwritten. If LTV at
                                                                                        the time the loan is
                                                                                        underwritten is missing,
                                                                                        use 100%.
Amortization Term.................  The amortization term is    Non-negative integer   If missing, use 31 years.
                                     the period that would       in years.
                                     take a borrower to pay a
                                     loan completely if the
                                     borrower only makes the
                                     scheduled payments, for a
                                     given loan balance, at a
                                     specified interest rate,
                                     and without making any
                                     balloon payment.
Interest-Only (IO)................  A loan that requires only   Yes, No..............  Yes.
                                     payment of interest
                                     without any principal
                                     amortization during all
                                     or part of the loan term.
Loan Term.........................  The loan term is the        Non-negative integer   If missing, use 11 years.
                                     period between              in years.
                                     origination and final
                                     loan payment (which may
                                     be a balloon payment) as
                                     stated in the loan
                                     origination documents.

[[Page 33420]]

 
Mark-to-Market DSCR (MTMDSCR).....  MTMDSCR is the DSCR stated  Greater than or equal  In a case where MTMDSCR
                                     on the most recent          to 0.                  is not available, the
                                     property operating                                 last observed DSCR can
                                     statement. For interest-                           be marked to market
                                     only loans, use fully                              using a property NOI
                                     amortizing MTMDSCR when                            index or an NOI estimate
                                     determining BaseCapital.                           based on rent and
                                                                                        expense indices. If the
                                                                                        index is not
                                                                                        sufficiently granular,
                                                                                        either because of its
                                                                                        frequency or geography,
                                                                                        or with respect to a
                                                                                        certain multifamily
                                                                                        property type, use a
                                                                                        more geographically
                                                                                        broad index or a
                                                                                        recently estimated mark-
                                                                                        to-market value.
Mark-To-Market Loan-to-Value        MTMLTV is an estimate of    Greater than or equal  If missing, mark to
 (MTMLTV) ratio.                     the current LTV, derived    to 0.                  market using an index.
                                     by marking to market the                           If the index is not
                                     acquisition LTV using a                            sufficiently granular,
                                     multifamily property                               either because of its
                                     value index or property                            frequency or geography
                                     value estimate based on                            or with respect to a
                                     NOI and cap rate indices.                          certain multifamily
                                                                                        property type, use more
                                                                                        geographically broad
                                                                                        index or a recently
                                                                                        estimated mark-to-market
                                                                                        value.
Market Value......................  The value of the loan       .....................  UPB.
                                     reported in an
                                     Enterprise's fair value
                                     disclosures.
Net Operating Income (NOI)/Net      NOI is defined as the       Greater than or equal  Infer using origination
 Cash Flow (NCF).                    rental income generated     to 0.                  LTV or origination DSCR.
                                     by the property net of                             Alternatively, infer
                                     vacancy and property                               using actual MTMLTV or
                                     operating expenses. NCF                            actual MTMDSCR.
                                     is defined as NOI minus
                                     any below-the-line
                                     expenses, which usually
                                     include capital
                                     improvement reserves and
                                     leasing commissions.
Original Loan Size................  The original loan size is   Non-negative dollar    $3,000,000.
                                     the dollar amount of the    value.
                                     loan at origination.
Payment Performance...............  The payment status or       Performing,            If missing, set to
                                     history of a multifamily    Delinquent, Re-        Modified.
                                     loan.                       performing (without
                                                                 Modification),
                                                                 Modified.
Special Product...................  Multifamily loans that are  Not a Special          If missing, set to Rehab/
                                     Government-Subsidized,      Product, Government-   Value-Add/Lease-Up.
                                     Student Housing, Rehab/     Subsidized, Student
                                     Value-Add/Lease-Up,         Housing, Rehab/Value-
                                     Supplemental.               Add/Lease-Up,
                                                                 Supplemental.
Unpaid Principal Balance (UPB$)...  The remaining unpaid        UPB > $0.............  If missing, use
                                     principal balance on the                           $100,000,000.
                                     loan as of the reporting
                                     date.
----------------------------------------------------------------------------------------------------------------

Sec.  1240.32   Loan segments for multifamily whole loans and 
guarantees credit risk capital requirement.

    (a) An Enterprise must assign each multifamily whole loan and 
guarantee in its portfolio with exposure to credit risk to a loan 
segment. Multifamily loan segments are determined based on the type of 
interest rate contract used in the whole loan or guarantee. The 
multifamily loan segments are: Multifamily Fixed Rate Mortgage 
(Multifamily FRM) and Multifamily Adjustable Rate Mortgage (Multifamily 
ARM).
    (b) A multifamily whole loan and guarantee that has both a fixed 
rate period and an adjustable rate period, also known as a hybrid loan, 
should be classified and treated as a Multifamily FRM during the fixed 
rate period, and classified and treated as a Multifamily ARM during the 
adjustable rate period.


Sec.  1240.33   Base credit risk capital requirement for multifamily 
whole loans and guarantees.

    An Enterprise must determine BaseCapitalbps for a multifamily whole 
loan and guarantee by using the multifamily credit risk capital grid 
that corresponds to a particular loan segment, presented in Tables 20 
and 21 to part 1240. A new acquisition is a multifamily whole loan or 
guarantee that was originated within five months or less.
    (a) Multifamily FRM BaseCapitalbps is shown in Table 20. For each 
whole loan and guarantee classified as Multifamily FRM, BaseCapitalbps 
is the value in the cell in Table 20 determined using the whole loan or 
guarantee's acquisition DSCR and acquisition LTV in the case of a new 
acquisition, or using the whole loan or guarantee's MTMDSCR and MTMLTV 
in the case of a seasoned loan. For a multifamily IO whole loan and 
guarantee, an Enterprise must use the fully amortized payment to 
calculate acquisition DSCR and MTMDSCR.
BILLING CODE 8070-01-P

[[Page 33421]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.047

    (b) Multifamily ARM BaseCapitalbps is shown in Table 21. For each 
whole loan or guarantee classified as a multifamily ARM loan, 
BaseCapitalbps is the value in the cell in Table 21 determined using 
the whole loan and guarantee's acquisition DSCR and acquisition LTV in 
the case of a new acquisition, or using the whole loan or guarantee's 
MTMDSCR and MTMLTV in the case of a seasoned loan. For multifamily IO 
whole loans and guarantees, an Enterprise must use the fully amortized 
payment to calculate acquisition DSCR and MTMDSCR.

[[Page 33422]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.048

BILLING CODE 8070-01-C


Sec.  1240.34   Risk multipliers for multifamily whole loans and 
guarantees.

    (a) Risk multipliers increase or decrease the credit risk capital 
requirement for multifamily whole loans and guarantees based on a 
multifamily loan's assigned loan segment and risk characteristics. The 
multifamily risk multipliers are presented in Table 22 to part 1240.
    (b) The steps for calculating TotalCombRiskMult are as follows:
    (1) Determine the appropriate multifamily risk multipliers values 
from Table 22 based on the loan's characteristics and assigned loan 
segment.
    (2) Apply the appropriate formula to calculate the combined risk 
multiplier, CombRiskMult.
    (3) Calculate the TotalCombRiskMult as the larger of CombRiskMult 
and a combined multiplier floor of 0.5.

           Table 22 to Part 1240--Multifamily Risk Multipliers
------------------------------------------------------------------------
         Risk factor             Value or range        Risk multiplier
------------------------------------------------------------------------
Payment Performance.........  Performing..........  1.00.

[[Page 33423]]

 
                              Delinquent..........  1.10.
                              Re-Performing         1.10.
                               (without
                               Modification).
                              Modified............  1.20.
Interest-Only...............  No..................  1.00.
                              Yes (during the       1.10.
                               interest-only
                               period).
Original/Remaining Loan Term  Loan Term <= 1Yr....  0.70.
 in Years (Yr).               1Yr < Loan Term <=    0.75.
                               2Yr.
                              2Yr < Loan Term <=    0.80.
                               3Yr.
                              3Yr < Loan Term <=    0.85.
                               4Yr.
                              4Yr < Loan Term <=    0.90.
                               5Yr.
                              5Yr < Loan Term <=    0.95.
                               7Yr.
                              7Yr < Loan Term <=    1.00.
                               10Yr.
                              Loan Term < 10Yr....  1.15.
Original Amortization Term..  Amort. Term <= 20Yr.  0.70.
                              20Yr < Amort. Term    0.80.
                               <= 25Yr.
                              25Yr < Amort. Term    1.00.
                               <= 30Yr.
                              Amort. Term < 30Yr..  1.10.
Original Loan Size..........  Loan Size <=          1.45.
                               $3,000,000.
                              $3,000,000 < Loan     1.15.
                               Size <= $5,000,000.
                              $5,000,000 < Loan     1.00.
                               Size <= $10,000,000.
                              $10,000,000 < Loan    0.80.
                               Size <= $25,000,000.
                              Loan Size <           0.70.
                               $25,000,000.
Special Products............  Government-           0.60.
                               Subsidized.
                              Not a Special         1.00.
                               Product.
                              Student Housing.....  1.15.
                              Rehab/Value-Add/      1.25.
                               Lease-Up.
                              Supplemental........  Use FRM or ARM
                                                     Capital Grid by
                                                     adding supplemental
                                                     UPB to the base
                                                     loan and
                                                     recalculating DSCR
                                                     and LTV.
------------------------------------------------------------------------

    (c) The following risk multiplier calculations are to be used for 
each respective multifamily whole loan and guarantee with the described 
characteristics:
    (1) For each multifamily whole loan and guarantee that is a new 
acquisition, determine the appropriate risk multiplier values from 
Table 22 and apply the following formula to calculate 
TotalCombRiskMult:

TotalCombRiskMult = Max(CombRiskMult, 0.5) = Max(Payment Performance 
Multiplier x Interest-Only Multiplier x Original Loan Term Multiplier x 
Original Amortization Term Multiplier x Original Loan Size Multiplier x 
Special Products Multiplier, 0.5)

    (2) For each multifamily whole loan and guarantee classified as a 
seasoned loan, determine the appropriate risk multiplier values from 
Table 22 and apply the following formula to calculate 
TotalCombRiskMult:

TotalCombRiskMult = Max(CombRiskMult, 0.5) = Max(Payment Performance 
Multiplier x Interest-Only Multiplier x Remaining Loan Term Multiplier 
x Original Amortization Term Multiplier x Original Loan Size Multiplier 
x Special Products Multiplier, 0.5)

    (3) For each multifamily whole loan and guarantee defined as a 
supplemental loan, an Enterprise must determine the additional capital 
required for that supplemental loan, or supplemental loans if there is 
more than one supplemental loan on a property. The steps for 
calculating the additional capital are as follows:
    (i) An Enterprise must recalculate DSCRs and LTVs for the original 
and supplemental loans using combined loan balances and combined 
income/payment information.
    (ii) Using the recalculated DSCR and LTV for each supplemental 
loan, use Table 20 for a multifamily FRM, or Table 21 for a multifamily 
ARM, to calculate the credit risk capital.
    (iii) For each supplemental loan, using the combined loan balance 
of the original and the supplemental, apply the loan size risk 
multiplier specified in Table 22 for the factor Original Loan Size.
    (iv) The capital for a supplemental loan must be calculated as the 
difference between the combined capital requirements for the original 
and all previous supplemental loans using the combined DSCR, LTV, and 
loan balance, and the capital requirement for the original loan plus 
other supplemental loans using the combined DSCR, LTV, and loan 
balance.


Sec.  1240.35   Gross credit risk capital requirement for multifamily 
whole loans and guarantees.

    An Enterprise must determine GrossCreditRiskCapReqbps for each 
multifamily loan and guarantee as the product of BaseCapitalbps and 
TotalCombRiskMult as follows:

GrossCreditRiskCapReqbps = BaseCapitalbps x TotalCombRiskMult


Sec.  1240.36   Net credit risk capital requirement for multifamily 
whole loans and guarantees.

    (a) An Enterprise must determine the net credit risk capital 
requirement for a multifamily whole loan and guarantee 
(NetCreditRiskCapReqbps). For a multifamily whole loan and guarantee, 
NetCreditRiskCapReqbps equals GrossCreditRiskCapReqbps:

NetCreditRiskCapReqbps = GrossCreditRiskCapReqbps

    (b) An Enterprise shall determine the net credit risk capital 
requirement in dollars (NetCreditRiskCapReq$) using the following 
equation:

NetCreditRiskCapReq$ = UPB x NetCreditRiskCapReqbps/10,000

    (c) The aggregate net credit risk capital requirement for all 
multifamily whole loans and guarantees (NetCreditRiskCapReq$\MFWL) is 
the sum of each loan's NetCreditRiskCapReq$.

[[Page 33424]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.049

Sec.  1240.37   Multifamily credit risk transfer capital relief for 
multifamily whole loans and guarantees.

    A multifamily credit risk transfer (``multifamily CRT'') is a 
credit risk transfer where the underlying whole loans and guarantees 
backing the CRT, or referenced by the CRT, are multifamily whole loans 
and guarantees. A multifamily CRT may reduce required credit risk 
capital. The methodology for calculating the reduction, also known as 
capital relief, combines credit risk capital requirements and expected 
losses on the multifamily whole loans and guarantees underlying or 
referenced by the CRT, tranche structure, ownership, and counterparty 
credit risk. The methodology is provided in Sec.  1240.38.


Sec.  1240.38   Calculation of capital relief for a multifamily CRT.

    (a) To calculate capital relief for a multifamily CRT, an 
Enterprise must have data that enables it to assign accurately the 
parameters described in paragraphs (b) and (c) of this section.
    (1) Data used to assign the parameters must be the most currently 
available data. If the contracts governing the multifamily CRT require 
payments on a monthly or quarterly basis, the data used to assign the 
relevant parameters must be no more than 91 calendar days old.
    (2) If an Enterprise does not have the data to assign the 
parameters described in paragraphs (b) and (c) of this section, then an 
Enterprise must treat the multifamily CRT as if no capital relief had 
occurred.
    (b) To calculate capital relief on a multifamily CRT, an Enterprise 
must have accurate data on the following parameters:
    (1) CRT tranche attachment point. An Enterprise must have accurate 
information on each tranche's attachment point (ATCH) in the 
multifamily CRT. For a given tranche, ATCH represents the threshold at 
which credit losses of principal will first be allocated. For a given 
tranche, ATCH equals the ratio of the current dollar amount of 
underlying subordinated tranches relative to the current dollar amount 
of all tranches all multiplied by 10,000. ATCH is expressed in basis 
points or as a value between zero and 10,000.
    (2) CRT tranche detachment point. An Enterprise must have accurate 
information on each tranche's detachment point (DTCH) in the 
multifamily CRT. For a given tranche, DTCH represents the threshold at 
which credit losses of principal would result in total loss of 
principal. For a given tranche, DTCH equals the sum of the tranche's 
ATCH and 10,000 multiplied by the ratio of the current dollar amount of 
tranches that are pari passu with the tranche (that is, have equal 
seniority with respect to credit risk) to the current dollar amount of 
all tranches. DTCH is expressed in basis points or as a value between 
zero and 10,000.
    (3) Multifamily lender loss sharing risk relief percentages. An 
Enterprise must have accurate information on each tranche's multifamily 
lender loss sharing risk relief percentage (MF_LS<not-eq>) in the 
multifamily CRT. Lender loss sharing CRTs are multifamily CRTs where 
the lender and an Enterprise share all multifamily credit losses on a 
pari passu basis. For a given tranche, MF_LS<not-eq> is the percentage 
of the tranche that is subject to lender loss sharing. MF_LS<not-eq> is 
expressed as a value between zero and 100%.
    (4) Multiple tranche loss sharing percentage by tranche. An 
Enterprise must have accurate information on each tranche's multiple 
tranche loss sharing risk relief percentage (MF_MTLS<not-eq>) for the 
multifamily CRT. For a given tranche, MF_MTLS<not-eq> is the percentage 
of the tranche that is either insured, reinsured, or afforded coverage 
through lender reimbursement of credit losses of principal and is not 
part of lender loss sharing. MF_MTLS<not-eq> is expressed as a value 
between zero and 100%.
    (5) Securitization risk relief percentage by tranche. An Enterprise 
must have accurate information on each tranche's securitization risk 
relief percentage (MF_S<not-eq>) in the multifamily CRT. For a given 
tranche, MF_S<not-eq> is the percentage of the tranche sold in the 
capital markets. MF_S<not-eq> is expressed as a value between zero and 
100%.
    (6) Credit risk capital on the underlying multifamily whole loans 
and guarantees. The Enterprises must have accurate data on PGCRCbps for 
the multifamily CRT. PGCRCbps is calculated using the aggregate 
NetCreditRiskCapReqbps for all multifamily whole loans and guarantees 
underlying the given multifamily CRT.
    (7) CRT expected losses. An Enterprise must have accurate data on 
total lifetime net expected credit risk losses (PGELbps) on the whole 
loans and guarantees underlying the multifamily CRT. PGELbps shall be 
calculated internally by an Enterprise. PGELbps does not include the 
operational risk capital requirement or going-concern buffer 
requirement. PGELbps is expressed in basis points or as a value between 
zero and 10,000.
    (8) Counterparty collateral on lender and multiple tranche loss 
sharing transactions. An Enterprise must have accurate data on the 
dollar amounts of CntptyCollat$ for each counterparty and by tranche in 
a multifamily CRT involving lender and multiple tranche loss sharing. 
For a given counterparty and tranche, CntptyCollat$ is the dollar 
amount of collateral to fulfill the counterparty's trust funding 
obligation. CntptyCollat$ is expressed in dollar terms as a value 
greater than or equal to zero.
    (9) Counterparty quota shares on lender and multiple tranche loss 
sharing transactions. An Enterprise must have accurate information on 
counterparty quota shares on lender and multiple tranche loss sharing 
transactions for each counterparty by tranche. For a given counterparty 
and tranche, CntptyShare<not-eq> is the percentage of MF_LS<not-eq> or 
MF_MTLS<not-eq> that the given counterparty covers. CntptyShare<not-eq> 
is expressed as a value between zero and 100%.
    (10) Counterparty ratings on lender and multiple tranche loss 
sharing transactions. An Enterprise must have internally generated 
ratings for the counterparties on lender and multiple tranche loss 
sharing transactions. An Enterprise should use the data inputs 
consistent with Table 2 to part 1240 to identify the CPHaircut. The 
internally generated ratings must be converted into the counterparty 
ratings provided in Table 3 to part 1240. The CPHaircut percentages for 
each counterparty rating provided in Table 3, are shown in Table 23 to 
part 1240.

[[Page 33425]]



 Table 23 to Part 1240--CPHaircut for Counterparty Rating on Lender and
               Multiple Tranche Loss Sharing Transactions
------------------------------------------------------------------------
                                           CPHaircut for
                                           concentration   CPHaircut for
           Counterparty rating            risk: Not high   concentration
                                                (%)       risk: High (%)
------------------------------------------------------------------------
1.......................................             2.1             3.4
2.......................................             5.3             8.5
3.......................................             6.0             9.6
4.......................................            12.7            19.2
5.......................................            16.2            22.9
6.......................................            22.5            28.5
7.......................................            41.2            45.1
8.......................................            48.2            48.2
------------------------------------------------------------------------

    (11) Aggregate unpaid principal balance. An Enterprise must have 
accurate information on each multifamily CRT's aggregate unpaid 
principal balance (UPB$).
    (c) For each multifamily CRT, an Enterprise must use the parameters 
described in paragraph (b) of this section to calculate multifamily CRT 
capital relief using one of the three following methods:
    (1) Lender loss sharing. The lender loss sharing capital relief 
formulae are as follows:
    (i) An Enterprise must calculate the portion of capital associated 
with the lender's exposure (LenderCapital$) using the following 
formula:

LenderCapital$ = (PGCRCbps/10,000) * UPB$ * MF_LS<not-eq>

    (ii) An Enterprise must determine the uncollateralized counterparty 
exposure (CntptyExposure$), which is reduced by 50% if the Enterprise 
has the contractual right to receive future lender guarantee-fee 
revenue. CntptyExposure$ is calculated as follows:
CntptyExposure$ = max([LenderCapital<INF>$</INF>-
CntptyCollat<INF>$</INF>],0)

    (iii) An Enterprise must determine counterparty credit risk in 
dollars (CntptyCreditRisk$). An Enterprise must use the following 
formula to calculate CntptyCreditRisk$:

CntptyCreditRisk<INF>$</INF> = CntptyExposure<INF>$</INF> * (CPHaircut)

    (iv) An Enterprise must calculate total CapRelief$ for the entire 
multifamily CRT by adding up the capital relief in dollars and 
subtracting counterparty credit risk.

CapRelief<INF>$</INF> = LenderCapital<INF>$</INF> - 
CntptyCreditRisk<INF>$</INF>

    (2) Securitization. The securitization multifamily capital relief 
formulae are as follows:
    (i) An Enterprise must distribute PGCRCbps to the tranches of the 
multifamily CRT, while controlling for PGELbps. For a given tranche, 
TCRCbps is as follows:
[GRAPHIC] [TIFF OMITTED] TP17JY18.050


TCRCbps takes values between 0 and 10,000. TCRCbps must be calculated 
for each tranche in the multifamily CRT.
    (ii) For each tranche in a multifamily CRT, an Enterprise must use 
the following formula to identify the capital relief from 
securitization (STCRCbps):


STCRCbps = MF_S<not-eq> * TCRCbps


STCRCbps is expressed in basis points and takes values between 0 and 
10,000.
    (iii) An Enterprise must calculate total CapRelief$ for the entire 
multifamily CRT by adding up the capital relief in dollars across each 
tranche.
[GRAPHIC] [TIFF OMITTED] TP17JY18.051

    (3) Multiple tranche loss sharing. The multiple tranche loss 
sharing multifamily capital relief formulae are as follows:
    (i) An Enterprise must distribute PGCRCbps to the tranches of the 
multifamily CRT, while controlling for PGELbps. For a given tranche, 
TCRCbps is as follows:
[GRAPHIC] [TIFF OMITTED] TP26JN18.052


TCRCbps takes values between 0 and 10,000. TCRCbps must be calculated 
for each tranche in the multifamily CRT.
    (ii) For each tranche in a multifamily CRT, an Enterprise must use 
the following formulae to identify the capital relief from multiple 
tranche loss sharing (MTLSTCRCbps):

MTLSTCRCbps = MF_MTLS<not-eq> * TCRCbps


MTLSTCRCbps is expressed in basis points and takes values between 0 and 
10,000.
    (iii) An Enterprise must determine the uncollateralized 
counterparty exposure (CntptyExposurebps) as follows:

[[Page 33426]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.053


CntptyExposurebps takes values between 0 and 10,000. CntptyExposurebps 
is reduced by 50% if the Enterprise has the contractual right to 
receive future lender guarantee-fee revenue.
    (iv) An Enterprise must determine counterparty credit risk 
(CntptyCreditRiskbps), using the following formula to calculate 
CntptyCreditRiskbps:

CntptyCreditRiskbps = CntptyExposurebps * (CPHaircut)

    (v) An Enterprise must calculate total capital relief in dollars 
for the entire multiple tranche loss sharing multifamily CRT 
(CapRelief$) by adding up the capital relief in dollars across each 
tranche and subtracting counterparty credit risk.
[GRAPHIC] [TIFF OMITTED] TP17JY18.054

    (d) Total multifamily capital relief. To calculate total capital 
relief across all multifamily CRTs (TotalCap Relief$\MFWL), an 
Enterprise must aggregate capital relief using the following:
[GRAPHIC] [TIFF OMITTED] TP17JY18.055

Sec.  1240.39   Multifamily whole loans market risk capital 
requirement.

    (a) Each multifamily whole loan with market risk exposure is 
subject to the multifamily whole loan market risk capital requirement. 
There is no market risk exposure for multifamily guarantees. The market 
risk capital requirement for a multifamily whole loan is limited to 
spread risk.
    (b) The multifamily whole loan market risk capital requirement is 
defined as the product of the market value, a defined spread shock of 
15 bps and SpreadDuration derived from an Enterprise's internal models.
    (c) The dollar amount of the MarketRiskCapReq$ for a multifamily 
whole loan is calculated as follows:

MarketRiskCapReq$ = Market Value x 0.0015 x SpreadDuration

    (d) The aggregate market risk capital requirement for all 
multifamily whole loans and guarantees (MarketRiskCapReq$\MFWL) is the 
sum of each loan's MarketRiskCapReq$:
[GRAPHIC] [TIFF OMITTED] TP17JY18.056

Sec.  1240.40   Multifamily securities market risk capital requirement.

    (a) Each Enterprise and Ginnie Mae guaranteed multifamily MBS 
(MFMBS) in portfolio is subject to a market risk capital requirement. 
The market risk capital requirement for MFMBS is limited to spread 
risk.
    (b) The MFMBS market risk capital requirement is defined as the 
product of the market value, a spread shock of 100 bps and the 
SpreadDuration derived from an Enterprise's internal models. The dollar 
amount of the MarketRiskCapReq$ for an MFMBS is calculated as follows:

MarketRiskCapReq$ = MFMBS Market Value x 0.0100 x SpreadDuration

    (c) The aggregate market risk capital requirement for all MFMBS 
(MarketRiskCapReq$\MFMBS) is the sum of each security's 
MarketRiskCapReq$:
[GRAPHIC] [TIFF OMITTED] TP17JY18.057

Sec.  1240.41   Operational risk capital requirement for multifamily 
whole loans and guarantees.

    (a) Each multifamily whole loan and guarantee is subject to an 8 
basis point operational risk capital requirement.
    (b) The operational risk capital requirement in dollar terms 
(OperationalRiskCapReq$) is calculated as follows:
    (1) If the Enterprise holds only credit risk or both credit and 
market risk, the calculation is as follows:

OperationalRiskCapReq$ = UPB x 0.0008

    (2) Otherwise, if the Enterprise holds only market risk the 
calculation is as follows:

OperationalRiskCapReq$ = Market Value x 0.0008

    (c) The aggregate operational risk capital requirement for all 
multifamily whole loans and guarantees (OperationalRiskCapReq$\MFWL) is 
the sum of each loan's OperationalRiskCapReq$.

[[Page 33427]]

[GRAPHIC] [TIFF OMITTED] TP17JY18.058

Sec.  1240.42   Operational risk capital requirement for multifamily 
securities.

    (a) Each MFMBS is subject to an 8 basis point operational risk 
capital requirement.
    (b) The operational risk capital requirement for MFMBS in dollar 
terms (OperationalRiskCapReq$) is calculated as follows:

OperationalRiskCapReq$ = MFMBS Market Value x 0.0008

    (c) The aggregate operational risk capital requirement for MFMBS 
(OperationalRiskCapReq$\MFMBS) is the sum of each security's 
OperationalRiskCapReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.059

Sec.  1240.43   Going-concern buffer requirement for multifamily whole 
loans and guarantees.

    (a) Each multifamily whole loan and guarantee is subject to a 75 
basis point going-concern buffer requirement (GCBufferReq$).
    (b) The dollar amount of the GCBufferReq$ is calculated as follows:
    (1) If the Enterprise holds only credit risk or both credit and 
market risk, the calculation is as follows:

GCBufferReq$ = UPB x 0.0075

    (2) Otherwise, if the Enterprise holds only market risk the 
calculation is as follows:

GCBufferReq$ = Market Value x 0.0075

    (c) The aggregate going-concern buffer requirement for all 
multifamily whole loans and guarantees (GCBufferReq$\MFWL) is the sum 
of each loan's GCBufferReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.060

Sec.  1240.44   Going-concern buffer requirement for multifamily 
securities.

    (a) Each MFMBS is subject to a 75 basis point going-concern buffer 
requirement.
    (b) The going-concern buffer requirement for MFMBS in dollar terms 
(GCBufferReq$) is calculated as follows:

GCBufferReq$ = MFMBS Market Value x 0.0075

    (c) The aggregate going-concern buffer requirement for all MFMBS 
(GCBufferReq$\MFMBS) is the sum of each security's GCBufferReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.061

Sec.  1240.45   Aggregate risk-based capital requirement for 
multifamily whole loans, guarantees, and related securities.

    The aggregate capital requirement for multifamily whole loans, 
guarantees and related securities is the cumulative total of: The 
aggregate net credit risk capital requirement; the aggregate market 
risk capital requirement; the aggregate operational risk capital 
requirement; the aggregate going-concern buffer requirement; net of the 
total capital relief from multifamily CRTs. The aggregate risk-based 
capital requirement for multifamily whole loans and guarantees 
(RiskBasedCapReq$\MFWLGS) is calculated as follows:

RiskBasedCapReq$\MFWLGS = NetCreditRiskCapReq$\MFWL + 
MarketRiskCapReq$\MFWL + MarketRiskCapReq$\MFMBS + 
OperationalRiskCapReq$\MFWL + OperationalRiskCapReq$\MFMBS + 
GCBufferReq$\MFWL + GCBufferReq$\MFMBS -TotalCapRelief$\MFWL


Sec.  1240.46  Non-Enterprise and non-Ginnie Mae CMBS risk-based 
capital requirement.

    (a) The risk-based capital requirement for a CMBS is the cumulative 
total of: A combined credit risk and market risk capital requirement, 
an operational risk capital requirement, and a going-concern buffer 
requirement.
    (b) A CMBS is subject to 200 basis point combined credit and market 
risk capital requirement. The combined credit and market risk capital 
requirement for a CMBS in dollar terms (CreditAndMarketRiskCapReq$) is 
calculated as follows:

CreditAndMarketRiskCapReq$ = CMBS Market Value x 0.0200

    (c) The aggregate combined credit and market risk capital 
requirement for CMBS (CreditAndMarketRiskCap Req$\CMBS) is the sum of 
each security's CreditAndMarketRiskCapReq$ as follows:
[GRAPHIC] [TIFF OMITTED] TP17JY18.062

    (d) A CMBS is subject to an 8 basis point operational risk capital 
requirement. The operational risk capital requirement for CMBS in 
dollar terms (OperationalRiskCapReq$) is calculated as follows:

OperationalRiskCapReq$ = CMBS Market Value x 0.0008


[[Page 33428]]


    (e) The aggregate operational risk capital requirement for CMBS 
(OperationalRiskCapReq$\CMBS) is the sum of each loan's 
OperationalRiskCapReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.063

    (f) A CMBS is subject to a 75 basis point going-concern buffer 
requirement. The going-concern buffer requirement for CMBS in dollar 
terms (GCBufferReq$) is calculated as follows:

GCBufferReq$ = CMBS Market Value x 0.0075

    (g) The aggregate going-concern buffer requirement for all CMBS 
(GCBufferReq$\CMBS) is the sum of each security's GCBufferReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.064

    (h) The total risk-based capital requirement for CMBS in dollar 
terms (RiskBasedCap$\CMBS) is calculated as follows:

RiskBasedCapReq$\CMBS = CapitalAndMarketRiskCap Req$\CMBS + 
OperationalRisk CapReq$\CMBS + GCBuffer Req$\CMBS


Sec.  1240.47   Other assets and exposures risk-based capital 
requirement.

    (a) Deferred Tax Assets (DTA). DTA are assets on the balance sheet 
that may be used to reduce taxable income. For purpose of this section, 
adjusted core capital is core capital less DTA that arise from net 
operating losses and tax credit carryforwards, net of any related 
valuation allowances and net of deferred tax liabilities (DTL). The 
risk-based capital requirement for DTA is calculated as follows:

RiskBasedCapReq$_DTA =

100 percent of DTA that arise from net operating losses and tax credit 
carryforwards, net of any related valuation allowances and net DTL + 
100 percent of DTA arising from temporary differences that could not be 
realized through net operating loss carrybacks, net of related 
valuation allowances and net of DTL, that exceed 10 percent of adjusted 
core capital + 20 percent of DTA arising from temporary differences 
that could not be realized through net operating loss carrybacks, net 
of related valuation allowances and net of DTL, that do not exceed 10 
percent of adjusted core capital + 8 percent of DTA arising from 
temporary differences that could be realized through net operating loss 
carrybacks, net of related valuation allowances and net of DTL.

    (b) Municipal Debt. A Municipal Debt instrument is an obligation 
issued by a state, a local government, or a state agency such as a 
housing finance agency. The risk-based capital requirement for 
Municipal Debt is the cumulative total of a market risk capital 
requirement; an operational risk capital requirement; and a going-
concern buffer requirement. There is no credit risk capital requirement 
for Municipal Debt.
    (1)(i) A Municipal Debt instrument is subject to a 760 basis point 
market risk capital requirement. The market risk capital requirement 
for a Municipal Debt instrument in dollar terms (MarketRiskCapReq$) is 
calculated as follows:

MarketRiskCapReq$ = Municipal Debt Market Value x 0.076
    (ii) The aggregate market risk capital requirement for all 
Municipal Debt (MarketRiskCapReq$\MD) is the sum of each instrument's 
MarketRiskCapReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.065

    (2) Municipal debt is subject to an 8 basis point operational risk 
capital requirement. The operational risk capital requirement for 
municipal debt in dollar terms (OperationalRiskCapReq$) is calculated 
as follows:

OperationalRiskCapReq$ = Municipal Debt Market Value x 0.0008


The aggregate operational risk capital requirement for municipal debt 
(OperationalRiskCapReq$\MD) is the sum of each instrument's 
OperationalRiskCapReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.066

    (3)(i) Municipal debt is subject to a 75 basis point going-concern 
buffer requirement. The going-concern buffer requirement for municipal 
debt in dollar terms (GCBufferReq$\MD) is calculated as follows:

GCBufferReq$ = Municipal Debt Market Value x 0.0075

    (ii) The aggregate going-concern buffer requirement for all 
municipal debt (GCBufferReq$\MD) is the sum of each security's 
GCBufferReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.067


[[Page 33429]]


    (4) The total risk-based capital requirement for municipal debt in 
dollar terms (RiskBasedCap$\MD) is calculated as follows:

RiskBasedCapReq$\MD = MarketRiskCapReq$\MD + OperationalRiskCapReq$\MD 
+ GCBufferReq$\MD

    (c) Cash and cash equivalents. Cash and cash equivalents are highly 
liquid investment securities that have a maturity at the date of 
acquisition of three months or less and are readily convertible to 
known amounts of cash. Cash and cash equivalents are not subject to 
credit risk, market risk, or operational risk capital requirements, nor 
is there a going-concern buffer requirement for cash and cash 
equivalents. The total risk-based capital requirement for cash and cash 
equivalent assets is zero.
    (d) Reverse Mortgage Loans and Securities. The capital requirement 
for Reverse Mortgage Loans and Securities is the cumulative total of: A 
market risk capital requirement, an operational risk capital 
requirement, and a going-concern buffer requirement.
    (1) The dollar amount of the MarketRiskCapReq$ for a reverse 
mortgage loan is calculated as follows:

MarketRiskCapReq$ = Market Value x 0.05
    (2) The dollar amount of the MarketRiskCapReq$ for a reverse 
mortgage security is calculated as follows:

    MarketRiskCapReq$ = Market Value x 0.0410
    (3) The aggregate market risk capital requirement for all reverse 
mortgage loans and securities (MarketRiskCapReq$\SFREV) is the sum of 
each loan's and security's MarketRiskCapReq$:
[GRAPHIC] [TIFF OMITTED] TP17JY18.068

    (4)(i) Reverse mortgage loans and securities are subject to an 8 
basis point operational risk capital requirement. The operational risk 
capital requirement for reverse mortgage loans and securities in dollar 
terms (OperationalRiskCapReq$) is calculated as follows:

OperationalRiskCapReq$ = Market Value x 0.0008

    (ii) The aggregate operational risk capital requirement for reverse 
mortgage loans and securities (MarketRiskCapReq$\SFREV)is the sum of 
each loan's and security's OperationalRiskCapReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.069

    (5)(i) Reverse mortgage loans and securities are subject to a 75 
basis point going-concern buffer requirement. The going-concern buffer 
requirement for reverse mortgage loans and securities in dollar terms 
(GCBufferReq$) is calculated as follows:

GCBufferReq$ = Market Value x 0.0075

    (ii) The aggregate going-concern buffer requirement for all reverse 
mortgage loans and securities (GCBuffer Req$\SFREV) is the sum of each 
loan's and security's GCBufferReq$.
[GRAPHIC] [TIFF OMITTED] TP17JY18.070

    (6) The total risk-based capital requirement for reverse mortgage 
loans and securities in dollar terms (RiskBasedCap$\SFREV) is 
calculated as follows:

RiskBasedCapReq$\SFREV = CapitalAndMarketRiskCap Req$\SFREV + 
OperationalRisk CapReq$\SFREV + GCBuffer Req$\SFREV

    (e) Single-family rentals. Single-family rentals are multiple 
income-producing single-family units owned by an investor for the 
purpose of renting them and deriving a profit from their operation. 
Single-family Rentals shall be treated as multifamily whole loans and 
guarantees for the purposes of assigning risk-based capital.


Sec.  1240.48   Unassigned Activities.

    (a) For purposes of this part, an Unassigned Activity means any 
asset, guarantee, off-balance sheet guarantee, or activity for which 
this part does not have an explicit risk-based capital treatment. An 
Unassigned Activity must be assigned a capital requirement.
    (b) The Director has the authority under 12 U.S.C. 4612(e) to treat 
as an Unassigned Activity any asset, guarantee, off-balance sheet 
guarantee or activity that exists as of the effective date of this 
part, or is not in existence as of the effective date of this part, 
which has:
    (1) Characteristics or unusual features that create risks for an 
Enterprise that are not adequately reflected in the specified 
treatments in this part; or
    (2) For which the specified treatment in this part no longer 
adequately reflects the risks to an Enterprise, either because of 
increased volume or because new information concerning those risks has 
become available.
    (c) The methodology for determining the capital requirement for an 
Unassigned Activity includes the following steps:
    (1) An Enterprise must provide a notification to FHFA of a proposal 
related to an Unassigned Activity as soon as possible, but in no event 
later than thirty days after the date on which the transaction closes 
or is settled. This obligation applies with respect to any activity for 
which this part does not otherwise specifically prescribe a risk-based 
capital requirement, or that FHFA has notified the Enterprise is an 
Unassigned Activity. The notification must include:
    (i) A proposal for an appropriate capital treatment that will 
capture the credit and market risk of the Unassigned Activity; and
    (ii) Narrative and data to explain the Unassigned Activity 
sufficient for FHFA to understand the risk profile of the Unassigned 
Activity.

[[Page 33430]]

    (2) FHFA will review the notification and determine whether an 
existing treatment specified in this part captures the risks of the 
Unassigned Activity. If FHFA determines there is no effective existing 
treatment, FHFA will determine an appropriate treatment. FHFA will 
provide an Enterprise with an order specifying the risk-based capital 
treatment for the Unassigned Activity. If FHFA does not provide an 
Enterprise with an order specifying the risk-based capital treatment 
for the Unassigned Activity in time for the Enterprise to prepare its 
capital report, an Enterprise shall use its own proposed capital 
treatment, reflecting its assessment of the capital required in light 
of the various risks the activity presents, including an operational 
risk capital requirement and a going-concern buffer requirement.
    (d) This part may be amended from time to time to provide for a 
risk-based capital requirement treatment for a specified Unassigned 
Activity.


Sec.  1240.49   Aggregate risk-based capital requirement calculation.

    (a) The calculation for the aggregate risk-based capital 
requirements for total capital (RiskBasedCapReq$_TOTAL), as described 
in Sec.  1240.4, is as follows:
[GRAPHIC] [TIFF OMITTED] TP17JY18.200

    (b) RiskBasedCapReq$_TOTAL shall also include any capital 
requirements for Unassigned Activities.


Sec.  1240.50  Minimum leverage capital requirement: 2.5 percent 
alternative.

    Each Enterprise shall maintain at all times core capital in an 
amount at least equal to 2.5 percent of total assets and off-balance 
sheet guarantees related to securitization activities, or such higher 
amount as the Director may require pursuant to part 1225 of this 
chapter.


Sec.  1240.51   Minimum leverage capital requirement: Bifurcated 
alternative.

    Each Enterprise shall maintain at all times core capital in an 
amount at least equal to 4% of non-trust assets and 1.5% of trust 
assets, or such higher amount as the Director may require pursuant to 
part 1225 of this chapter.

CHAPTER XVII--OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT, 
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

SUBCHAPTER C--SAFETY AND SOUNDNESS

PART 1750--[REMOVED]

0
4. Remove part 1750.

    Dated: June 27, 2018.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2018-14255 Filed 7-16-18; 8:45 am]
 BILLING CODE 8070-01-P


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