33312 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

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. 

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: 

• Agency Website: www.fhfa.gov/ 

open-for-comment-or-input. 

• 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 

RegComments@fhfa.gov to ensure 

timely receipt by FHFA. Include the 

following information in the subject line 

of your submission: Comments/RIN 

2590–AA95. 

• 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. 

• 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, 

NaaAwaa.Tagoe@fhfa.gov; Andrew 

Varrieur, Associate Director, Office of 

Financial Analysis, Modeling & 

Simulations, (202) 649–3141, 

Andrew.Varrieur@fhfa.gov; or Miriam 

Smolen, Associate General Counsel, 

Office of General Counsel, (202) 649– 

3182, Miriam.Smolen@fhfa.gov. 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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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33313 

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 RePerforming Loans Base Credit Risk 

Capital (in bps) 

Table 12: Single-Family Modified RePerforming 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 NonCancellable 

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 SingleFamily 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 MortgageBacked 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 RiskBased 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. 


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33314 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

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 offbalance 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 riskinvariant 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 offbalance 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 offbalance 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 nontrust 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 riskbased 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 


daltland on DSKBBV9HB2PROD with PROPOSALS2
Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33315 

1Public Law 110–289, Div. A, July 30, 2008, 122 

Stat. 2659. 2Public Law 102–550, Title XIII, October 28, 

1992, 106 Stat. 3941. 

3Press Release, ‘‘FHFA Announces Suspension of 

Capital Classifications During Conservatorship,’’ 

Oct. 9, 2008. 

4 12 CFR part 1750. 

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. 

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. 

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

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. 

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 noncumulative perpetual preferred stock. 

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 


daltland on DSKBBV9HB2PROD with PROPOSALS2
33316 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

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). 

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. 

12Public Law 111–203, July 21, 2010, 124 Stat. 

1376. 

13 12 CFR part 1238. 

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 promptcorrective-action provisions and added 

the agency’s conservatorship and 

receivership authorities. 

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 DoddFrank 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. 

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 mortgagebacked 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 privatelabel 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 mortgagebacked 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 


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14See FHFA’s Report to Congress for private-label 

security holdings, serious delinquency rate, and 

credit loss data. 

15When 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. 

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. AltA 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 AAArated 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 AltA 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 DoddFrank 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 privatelabel 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. 

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. 

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 privatelabel 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 


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16https://www.fhfa.gov/Conservatorship. 

17https://www.fhfa.gov/Media/PublicAffairs/ 

Pages/Statement-from-FHFA-Director-Melvin-LWatt-on-Capital-Reserve-for-Fannie-Mae-andFreddie-Mac.aspx. 

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

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

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 


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18Public Law 112–78, Dec. 23, 2011, 125 Stat. 

1280. 

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. 

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 Maeguaranteed 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 newacquisition 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 loanto-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 


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balances (UPB) through traditional loanlevel 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-tovalue 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 highlyrated 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 loanlevel 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 singlefamily 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-toincome (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. 


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19Fannie 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 singlefamily serious delinquency rate fell from 1.83 

percent to 1.08 percent over the same period. 

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

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 


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20 12 CFR 324.403. 

21The supplemental leverage ratio includes offbalance sheet exposures for large banks. 

22The 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. 

23See Table 1 at https://www.federalreserve.gov/ 

publications/comprehensive-capital-analysis-andreview-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. 

24The DFAST and CCAR capital analyses use the 

same projections of income, assets and RWA, but 

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 riskbased 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 DoddFrank Act’s Collins Amendment large 

U.S. banks must compute their riskweighted 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 riskbased 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 riskbased 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. 

The banking regulators also mandate 

three capital buffers relative to the riskbased 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 ninequarter planning horizon.23

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


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use different capital action assumptions to project 

post-stress capital levels. 25The 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). 

26The 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. 

27The 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 

Continued 

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. 

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

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 noninterest 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 riskweighted asset density using end-ofquarter data from the first quarter of 

2011 through the fourth quarter of 2014. 

The analysis estimated an overall riskweighted 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 singlefamily 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 


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2017 DFAST cycle assumes a 30 percent home price 

decline in its severely adverse scenario. 

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 lifeof-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. 

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 ninequarter 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. 


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28The Enterprises are no longer acquiring PLS 

and CMBS, and their holdings of these assets are 

currently in run-off mode. 

29FHFA 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. 

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 riskinvariant 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 riskbased 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 singlefamily 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. 

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 mortgagerelated 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 riskbased 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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30Between 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. 

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 offbalance 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 nontrust 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 riskbased 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

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 


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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33327 

31The Enterprises continue to report their capital 

levels based on prior accounting rules. See 

Regulatory Interpretation 2010–RI–1, Jan. 12, 2010. 

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

DTAs. 

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

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 riskbased capital requirements exceeded 

projected credit losses for both 

Enterprises for all loans acquired or 

guaranteed, excluding those that are not 

currently eligible for purchase. 

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

$ in 

billions 

% of total 

assets and 

off-balance 

sheet 

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, 2007 ........................................................................................................ 167 5.5 

Statutory Minimum Capital Requirement as of Dec 31, 2007 ................................................................................ 42 1.4 

. . . 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, 2007 .............................................................................................................. 68 2.2 

. . . Relative to Peak Capital Losses ..................................................................................................................... (100) (3.3) 

Proposed Risk-based Capital Requirement as of Dec 31, 2007 ............................................................................ 171 5.6 

. . . 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 singlefamily 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 


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33328 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

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

$ in 

billions 

% of UPB 

as of 

Dec 31, 2007 

Lifetime Single-Family Credit Losses on the Dec 31, 2007 Guarantee Portfolio ................................................... $85 3.4 

Proposed SF Credit Risk Capital Requirement as of Dec 31, 2007 ...................................................................... 94 3.7 

. . . Relative to Lifetime Credit Losses .................................................................................................................. 9 0.4 

Lifetime Single-Family Credit Losses on the Dec 31, 2007 Guarantee Portfolio using Current Acquisition Criteria * .................................................................................................................................................................... 21 1.5 

Proposed SF Credit Risk Capital Requirement using Current Acquisition Criteria * .............................................. 30 2.1 

. . . 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 riskbased 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

$ in 

billions 

% of total 

assets and 

off-balance 

sheet 

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, 2007 .......................................................................................................... 98 4.5 

Statutory Minimum Capital Requirement as of Dec 31, 2007 ................................................................................ 26 1.2 

. . . 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, 2007 .............................................................................................................. 53 2.4 

. . . Relative to Peak Capital Losses ..................................................................................................................... (45) (2.1) 

Proposed Risk-based Capital Requirement as of Dec 31, 2007 ............................................................................ 110 5.0 

. . . 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 singlefamily 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 singlefamily 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. 


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TABLE 4—FREDDIE MAC’S SINGLE-FAMILY CREDIT RISK CAPITAL REQUIREMENT COMPARISON TO LIFETIME SINGLE-FAMILY

CREDIT LOSSES

$ in 

billions 

% of UPB 

as of 

Dec 31, 2007 

Lifetime Single-Family Credit Losses on the Dec 31, 2007 Guarantee Portfolio ................................................... $64 3.7 

Proposed SF Credit Risk Capital Requirement as of Dec 31, 2007 ...................................................................... 59 3.4 

. . . Relative to Lifetime Credit Losses .................................................................................................................. (5) (0.3) 

Lifetime Single-Family Credit Losses on the Dec 31, 2007 Guarantee Portfolio using Current Acquisition Criteria * .................................................................................................................................................................... 20 1.7 

Proposed SF Credit Risk Capital Requirement using Current Acquisition Criteria * .............................................. 24 2.1 

. . . 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 requirement 

Freddie Mac 

capital requirement 

Enterprises’ combined 

capital requirement 

$billions bps Share 

(%) $billions bps Share (%) $billions bps Share (%) 

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, 

$billions ......................................................................... 3,353.1 .............. .............. 2,226.0 .............. .............. 5,579.0 .............. ..............

* 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. 


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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 

Fannie Mae Freddie Mac Enterprises 

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 


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33February 2010 Foreclosure Prevention and 

Refinance Report. 

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. 

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 riskbased 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 singlefamily 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 


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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 onsite 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 procyclical 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 markto-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 procyclicality of the proposed risk-based 


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34See the Basel Committee on Banking 

Supervision—International Convergence of Capital 

Measurement and Capital Standards, June 2004. 

35The 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. 

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 singlefamily 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 riskbased 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 riskbased 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

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. 

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)] 

Amounts in $billions Fannie Mae Freddie Mac Weighted 

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 × 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 


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average. The requirement may be 

expressed as follows: 

KBIA = [S(GI1 . . . n × a)]/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 

a = 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 goingconcern 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 goingconcern buffer. FHFA ultimately 

determined that the size of the goingconcern 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 singlefamily 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 goingconcern 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 §§ 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 singlefamily business operations throughout 

periods of economic uncertainty. In the 

context of the proposed rule, singlefamily 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 singlefamily 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 singlefamily whole loans and mortgagebacked securities held for investment 

purposes. 

To implement the proposed singlefamily capital requirements, the 

Enterprises would use a set of singlefamily 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 goingconcern 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. 


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36The charter acts permit three types of credit 

enhancement for such high-LTV loans, but private 

mortgage insurance is by far the most commonly 

used. 

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 singlefamily 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 mortgagebacked 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’ singlefamily 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 goingconcern 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 goingconcern 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 singlefamily mortgages primarily through two 

types of transactions: Lender swap 

transactions and cash window 

transactions. In a lender swap 

transaction, lenders pool similar singlefamily 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 singlefamily 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 singlefamily loans with loan-to-value ratios 

over 80 percent.36 In addition to loanlevel 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. 

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 singlefamily capital requirements would have 

the following components: Credit risk 

capital, including relief for credit risk 

transfers; market risk capital; 

operational risk capital; and a goingconcern buffer. Each component is 

discussed in detail in the ensuing 

subsections. 

a. Credit Risk 

This section corresponds to Proposed 

Rule §§ 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 


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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 preexisting 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 loanto-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 singlefamily 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 singlefamily-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 §§ 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: 

• 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. 

• 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. 

• Non-modified re-performing: Loans 

that are currently performing and have 

had a prior 30-day delinquency, but not 

a prior modification. 

• Modified re-performing: Loans that 

are currently performing and have had 

a prior 30-day delinquency and a prior 

modification. 

• 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 


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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. 

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 singlefamily 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. 

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 singlefamily whole loans and guarantees in 

the new originations loan segment are 

original credit score and original loanto-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. 

BILLING CODE 8070–01–P 


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38FHFA 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-FannieMae-and-Freddie-Mac-Credit-ScoreRequirements.aspx. 

BILLING CODE 8070–01–C 

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 


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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. 

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, owneroccupied, 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 singlefamily whole loans and guarantees in 

the performing seasoned loan segment 

are refreshed credit score and mark-tomarket 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. 

BILLING CODE 8070–01–P 


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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, 


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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 singlefamily 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. Reperforming 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 reperforming loan segment is presented in 

Table 11. 

BILLING CODE 8070–01–P 


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BILLING CODE 8070–01–C 

In the proposed rule, re-performing 

risk capital requirement for a rethan three years, the proposed credit 

the re-performing duration is greater 

performing duration increases. When 

requirements would decrease as resuch that credit risk capital 

duration is divided into four categories 

breakpoints for MTMLTV are 

capital grid. The proposed ranges and 

and use the appropriate credit risk 

being classified as performing seasoned 

have not been modified, would revert to 

perform for greater than four years, and 

performing seasoned loan. Loans that recredit risk capital requirements for a 

performing loan would approximate the 

10). 

performing seasoned loan grid (Table 

unchanged from those found in the 

Aside from the primary risk factors 

estimations underlying the credit risk 

of the synthetic loan used in the 

factors accounted for in the risk profile 

11, there are many secondary risk 

represented in the dimensions of Table 


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Table 11: Single-Family Non-Modified Re-Perlorming Loans Base Credit Risk Capital (in bps) 

30%< 60%< 70%< 75%< 80%< 85%< 90%< 95%< 

MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV 

80% 100% 

0< 

Months 8 122 315 433 525 658 763 843 929 

3 

Months 3< 

Since Last Months 7 88 245 340 421 522 623 708 791 

Delinquency 12 

12 < 

Months 6 67 202 285 353 431 523 607 693 

36 

36 < 

Months 8 46 132 198 285 349 447 550 642 

48 
Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 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 singlefamily whole loans and guarantees in 

the modified re-performing loan 

segment are similar to those in the nonmodified 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 reperforming loan segment is presented in 

Table 12. 

BILLING CODE 8070–01–P 


daltland on DSKBBV9HB2PROD with PROPOSALS2
BILLING CODE 8070–01–C 

Aside from the primary risk factors 

12. These secondary risk factors, along 

capital requirements presented in Table 

estimations underlying the credit risk 

of the synthetic loan used in the 

factors accounted for in the risk profile 

12, there are many secondary risk 

represented in the dimensions of Table 

would result in a higher or lower credit 

loan or guarantee more or less risky and 

characteristics would make the whole 

Variations from these risk 

modified re-performing loans. 

loans, are the same as those for noncapital grid for modified re-performing 

baseline risk profile for the credit risk 

with the values that determine the 

described in the next section. 

captured using risk multipliers as 

secondary risk factors would be 

the proposed rule, variations in these 

base credit risk capital requirement. In 

risk capital requirement relative to the 

Contrary to re-performing singlemodified, loans in the modified refamily loans that have not been 


EP17JY18.003</GPH>daltland on DSKBBV9HB2PROD with PROPOSALS2

Table 12: Single-Family Modified Re-Perlorming Loans Base Credit Risk Capital (in bps) 

30%< 60%< 70%< 75%< 80%< 85%< 90%< 95%< 

MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV 

80% 100% 

0< 

Months 14 195 474 613 715 806 904 993 1061 

Minimum of 3 

(!)Months 3< 

Since Last Months 13 153 388 506 593 678 776 868 946 

Modification 12 

and(2) 12 < 

Months Since Months 12 119 314 415 493 576 671 767 849 

Last 36 

Delinquency 36 < 

Months II 84 220 313 425 500 611 733 830 

48 
Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 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 singlefamily 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 nonperforming 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 nonperforming 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] 

MTMLTV 

<= 30% 

30% < 

MTMLTV 

<= 60% 

60% < 

MTMLTV 

<= 70% 

70% < 

MTMLTV 

<= 75% 

75% < 

MTMLTV 

<= 80% 

80% < 

MTMLTV 

<= 85% 

85% < 

MTMLTV 

<= 90% 

MTMLTV 

> 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 singlefamily-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’ singlefamily 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 


daltland on DSKBBV9HB2PROD with PROPOSALS2
33346 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

own estimated values before combining 

values to determine the proposed singlefamily risk multipliers. The proposed 

single-family risk multipliers are 

presented in Table 14. 

TABLE 14—SINGLE-FAMILY RISK MULTIPLIERS

Risk factor Value or range 

Risk multipliers by single-family loan segment 

New 

originations 

Performing 

seasoned 

Non-modified 

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 

Home.

1.0 1.0 1.0 1.0 1.0 

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 ............................

TPO ....................................

1.0 

1.1 

1.0 

1.1 

1.0 

1.1 

1.0 

1.1 

1.0 

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 × Second Lien).No subordination ................

30% < OLTV <= 60% and 

0% < subordination <= 

5%.

1.0 

1.1 

1.0 

1.1 

1.0 

0.8 

1.0 

1.0 

........................

........................

30% < OLTV<= 60% and 

subordination > 5%.

1.5 1.5 1.1 1.2 ........................

OLTV > 60% and 0% < 

subordination <= 5%.

1.1 1.1 1.2 1.1 ........................

OLTV > 60% and subordination > 5%.1.4 1.4 1.5 1.3 ........................

Loan Age ............................. Loan Age <= 24 months .... ........................ 1.0 ........................ ........................ ........................

24 months < Loan Age <= 

36 months.

........................ 0.95 ........................ ........................ ........................

36 months < Loan Age <= 

60 months.

........................ 0.8 ........................ ........................ ........................

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 

Documentation.

........................ 1.3 1.3 1.2 ........................

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 

Score < 640.

........................ ........................ 1.3 1.2 ........................

640 <= Refreshed Credit 

Score < 660.

........................ ........................ 1.2 1.1 ........................

660 <= Refreshed Credit 

Score < 700.

........................ ........................ 1.0 1.0 ........................

700 <= Refreshed Credit 

Score < 720.

........................ ........................ 0.7 0.8 ........................

720 <= Refreshed Credit 

Score < 740.

........................ ........................ 0.6 0.7 ........................


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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33347 

TABLE 14—SINGLE-FAMILY RISK MULTIPLIERS—Continued 

Risk factor Value or range 

Risk multipliers by single-family loan segment 

New 

originations 

Performing 

seasoned 

Non-modified 

RPL 

Modified 

RPL NPL 

740 <= Refreshed Credit 

Score < 760.

........................ ........................ 0.5 0.6 ........................

760 <= Refreshed Credit 

Score < 780.

........................ ........................ 0.4 0.5 ........................

Refreshed Credit Score >= 

780.

........................ ........................ 0.3 0.4 ........................

Payment change from modification.Payment Change >= 0% ....

¥20% <= Payment 

Change < 0%.

........................

........................

........................

........................

........................

........................

1.1 

1.0 

........................

........................

¥30% <= Payment 

Change < ¥20%.

........................ ........................ ........................ 0.9 ........................

Payment Change < ¥30% ........................ ........................ ........................ 0.8 ........................

Previous Maximum Delinquency (in the last 36 

months).

0–1 Months ........................

2–3 Months ........................

4–5 Months ........................

........................

........................

........................

........................

........................

........................

1.0 

1.2 

1.3 

1.0 

1.1 

1.1 

........................

........................

........................

6+ Months .......................... ........................ ........................ 1.5 1.1 ........................

Refreshed Credit Score for 

NPLs.

Refreshed Credit Score < 

580.

........................ ........................ ........................ ........................ 1.2 

580 <= Refreshed Credit 

Score < 640.

........................ ........................ ........................ ........................ 1.1 

640 <= Refreshed Credit 

Score < 700.

........................ ........................ ........................ ........................ 1.0 

700 <= Refreshed Credit 

Score < 720.

........................ ........................ ........................ ........................ 0.9 

720 <= Refreshed Credit 

Score < 760.

........................ ........................ ........................ ........................ 0.8 

760 <= Refreshed Credit 

Score < 780.

........................ ........................ ........................ ........................ 0.7 

Refreshed Credit Score >= 

780.

........................ ........................ ........................ ........................ 0.5 

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 singlefamily 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 singlefamily 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: 

• 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. 

• 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). 

• 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). 

• 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 


daltland on DSKBBV9HB2PROD with PROPOSALS2
33348 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

1.0), and one borrower being more risky 

(a multiplier greater than 1.0). 

• 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). 

• 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). 

• Interest-only. Interest-only reflects 

whether or not a loan has an interestonly 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. 

• 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. 

• 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: 

• 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). 

• 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. 

• Subordination (OLTV × 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). 

• 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. 

• 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. 

• Refreshed credit score for reperforming loans (RPLs) and nonperforming 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). 

• 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). 

• 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 


daltland on DSKBBV9HB2PROD with PROPOSALS2
Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 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 singlefamily 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 guidecoverage, and (iii) loan characteristics, 

including original LTV, loan age, 

amortization term, and loan 

performance segment. 

• Non-cancellable versus cancellable 

MI. Non-cancellable MI provides 

coverage for the life of the loan. Noncancellable 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, noncancellable 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. 

• 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. 

• 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. 

• 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. 

• 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 


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33350 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

loans would have a lower CE multiplier 

than performing loans. 

• 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 NONCANCELLABLE

Product/coverage type Coverage category CE multiplier 

15/20 Year Amortizing Loan with Guide-level Coverage ........... 80% < OLTV <= 85% and MI Coverage Percent = 6% ............

85% < OLTV <= 90% and MI Coverage Percent = 12% ..........

0.846 

0.701 

90% < OLTV <= 95% and MI Coverage Percent = 25% .......... 0.408 

95% < OLTV <= 97% and MI Coverage Percent = 35% .......... 0.226 

OLTV > 97% and MI Coverage Percent = 35% ........................ 0.184 

30 Year Amortizing Loan with Guide-level Coverage ................ 80% < OLTV <= 85% and MI Coverage Percent = 12% ..........

85% < OLTV <= 90% and MI Coverage Percent = 25% ..........

0.706 

0.407 

90% < OLTV <= 95% and MI Coverage Percent = 30% .......... 0.312 

95% < OLTV <= 97% and MI Coverage Percent = 35% .......... 0.230 

OLTV > 97% and MI Coverage Percent = 35% ........................ 0.188 

15/20 Year Amortizing Loan with Charter-level Coverage ......... 80% < OLTV <= 85% and MI Coverage Percent = 6% ............

85% < OLTV <= 90% and MI Coverage Percent = 12% ..........

0.846 

0.701 

90% < OLTV <= 95% and MI Coverage Percent = 16% .......... 0.612 

95% < OLTV <= 97% and MI Coverage Percent = 18% .......... 0.570 

OLTV > 97% and MI Coverage Percent = 20% ........................ 0.535 

30 Year Amortizing Loan with Charter-level Coverage .............. 80% < OLTV <= 85% and MI Coverage Percent = 6% ............

85% < OLTV <= 90% and MI Coverage Percent = 12% ..........

0.850 

0.713 

90% < OLTV <= 95% and MI Coverage Percent = 16% .......... 0.627 

95% < OLTV <= 97% and MI Coverage Percent = 18% .......... 0.590 

OLTV > 97% and MI Coverage Percent = 20% ........................ 0.558 

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 


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The second cancellable MI table 

modified RPL loan segment for loans 

contains proposed CE multipliers for the 

multipliers by type of coverage (charter 

amortization. The table differentiates 

with 30-year post-modification 

age. 

percent, amortization term, and loan 

and guide), original LTV, coverage 


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Table 16: CE Multipliers for New Originations, Performing Seasoned, and Non-Modified RPLs whe

Loan Age (months) 

5< 12 < 24 < 36 < 48 < 60 < 72< 84 < 

Loan Age Loan Age Loan Age Loan Age Loan Age Loan Age Loan Age Loan Age Loan Age 

12 24 36 84 96 

15/20 Year 80% < OLTV <- 85% 0.997 0.998 1000 1000 1000 1000 1000 1000 1000 

Amortizing and MI 6% 

Loan with 85% < OLTV <- 90% 0.963 0.971 0.988 0.999 1000 1000 1000 1000 1000 

Guide-level and MI 12% 

Coverage 90% < OLTV <- 95% 0.826 0.853 0.912 0.973 0.996 1000 1000 1000 1000 

and MI 25% 

95% < OLTV <- 97% 0.732 0.765 0.848 0.936 0.986 0.998 1000 1000 1000 

and MI 35% 

OL TV> 97% and MI 0.630 0.673 0.762 0.865 0.945 0.980 0.996 1000 1000 

Coverage= 35% 

30 Year 80% < OLTV <- 85% 0.867 0.884 0.928 0.962 0.994 0.999 1000 1000 1000 

Amortizing and MI 12% 

Loan with 85% < OLTV <- 90% 0.551 0.584 0.627 0.679 0.785 0.893 0.950 0.986 0.998 

Guide-level and MI 25% 

Coverage 90% < OLTV <- 95% 0.412 0.440 0.456 0.484 0.547 0.654 0.743 0.845 0.932 

and lv1l Coverage= 30% 

95% < OLTV <- 97% 0.322 0.351 0.369 0.391 0.449 0.535 0.631 0.746 0.873 and MI 35% 

OL TV> 97% and MI 0.272 0.295 0.314 0.353 0.410 0.462 0.515 0.607 0.756 

Coverage= 35% 

15/20 Year 80% < OLTV <- 85% 0.997 0.998 1000 1000 1000 1000 1000 1000 1000 

Amortizing and J\1I Coverage= 6% 

Loan with 85% < OLTV <- 90% 0.963 0.971 0.988 0.999 1000 1000 1000 1000 1000 

Charter-level and MI 12% Coverage 90% < OLTV <- 95% 0.887 0.904 0.943 0.983 0.997 1000 1000 1000 1000 

and MI 16% 

95% < OLTV <- 97% 0.854 0.874 0.918 0.966 0.992 0.999 1000 1000 1000 

and MI 18% 

OL TV> 97% and MI 0.788 0.810 0.859 0.922 0.969 0.989 0.998 1000 1000 

20% 

30 Year 80% < OLTV <- 85% 0.934 0.943 0.964 0.981 0.997 0.999 1000 1000 1000 

Amortizing and MI 6% 

Loan with 85% < OLTV <- 90% 0 780 0.795 0.819 0.845 0.896 0.948 0.976 0.993 0.999 

Charter-level and MI 12% Coverage 90% < OLTV <- 95% 0.679 0.690 0.703 0.719 0.755 0.813 0.861 0.916 0.963 

and MI 16% 

95% < OLTV <- 97% 0.642 0.652 0.662 0.676 0.708 0.756 0.806 0.866 0.933 

and MI 18% 

OL TV> 97% and MI 0.597 0.607 0.617 0.629 0.658 0.686 0.715 0.765 0.845 

Coverage= 20% 
33352 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

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 (charterlevel and guide-level), original LTV, 

coverage percent, and loan age. 


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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 (charterlevel and guide-level), original LTV, 

amortization term, and coverage 

percent. 

TABLE 19—CE MULTIPLIERS FOR NPLS

CE multiplier 

15/20 Year Amortizing Loan with Guide-level Coverage ........... 80% < OLTV <= 85% and MI Coverage Percent = 6% ............

85% < OLTV <= 90% and MI Coverage Percent = 12% ..........

0.893 

0.803 


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TABLE 19—CE MULTIPLIERS FOR NPLS—Continued 

CE multiplier 

90% < OLTV <= 95% and MI Coverage Percent = 25% .......... 0.597 

95% < OLTV <= 97% and MI Coverage Percent = 35% .......... 0.478 

OLTV > 97% and MI Coverage Percent = 35% ........................ 0.461 

30 Year Amortizing Loan with Guide-level Coverage ................ 80% < OLTV <= 85% and MI Coverage Percent = 12% ..........

85% < OLTV <= 90% and MI Coverage Percent = 25% ..........

0.813 

0.618 

90% < OLTV <= 95% and MI Coverage Percent = 30% .......... 0.530 

95% < OLTV <= 97% and MI Coverage Percent = 35% .......... 0.490 

OLTV > 97% and MI Coverage Percent = 35% ........................ 0.505 

15/20 Year Amortizing Loan with Charter-level Coverage ......... 80% < OLTV <= 85% and MI Coverage Percent = 6% ............

85% < OLTV <= 90% and MI Coverage Percent = 12% ..........

0.893 

0.803 

90% < OLTV <= 95% and MI Coverage Percent = 16% .......... 0.775 

95% < OLTV <= 97% and MI Coverage Percent = 18% .......... 0.678 

OLTV > 97% and MI Coverage Percent = 20% ........................ 0.663 

30 Year Amortizing Loan with Charter-level Coverage .............. 80% < OLTV <= 85% and MI Coverage Percent = 6% ............

85% < OLTV <= 90% and MI Coverage Percent = 12% ..........

0.902 

0.835 

90% < OLTV <= 95% and MI Coverage Percent = 16% .......... 0.787 

95% < OLTV <= 97% and MI Coverage Percent = 18% .......... 0.765 

OLTV > 97% and MI Coverage Percent = 20% ........................ 0.760 

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 wrongway 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 


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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 = LGDstress * PDstress * MA 

where LGDstress denotes stress loss given 

default, PDstress is stress default 

probability, and MA is maturity 

adjustment. MA is calculated as follows: 

PDstress is a function of expected probability 

of default PD, asset value correlation r, 

and an asset value correlation multiplier 

(AVCM). PDstress is calculated as follows: 

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 (r) ................................................................................................................................................................ Basel (PD). 

AVCM for High level of Mortgage Concentration Risk ................................................................................................................ 175%. 

AVCM for Not High level of Mortgage Concentration Risk ......................................................................................................... 125%. 

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. 


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TABLE 22—SINGLE-FAMILY COUNTERPARTY RISK HAIRCUT (CP HAIRCUT) MULTIPLIERS BY RATING, MORTGAGE

CONCENTRATION RISK, SEGMENT, AND PRODUCT

Counterparty rating 

(%) 

CP haircut 

Mortgage concentration risk: Not high Mortgage concentration risk: High 

New originations, performing 

seasoned, and re-performing 

loans Nonperforming 

loans 

(%) 

New originations, performing 

seasoned, and re-performing 

loans Nonperforming 

loans 

(%) 30 Yr 

product 

(%) 

20/15 Yr 

product 

(%) 

30 Yr 

product 

(%) 

20/15 Yr 

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 MaeGuaranteed 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 singlefamily 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 §§ 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 


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39Many reinsurance companies do not wish to be 

or are not licensed to write polices directly to noninsurance 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. 

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, poollevel 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 poollevel 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. 

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 


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40See 12 CFR 3.211 (OCC); 12 CFR 217.43 

(Federal Reserve Board); 12 CFR 324.43 (FDIC). 

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 posttransaction 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. 

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): 

• $1,000 million in UPB of 

performing 30-year fixed rate singlefamily whole loans and guarantees with 

original LTVs greater than 60 percent 

and less than or equal to 80 percent; 

• CRT coverage term of 10 years; 

• 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; 

• 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); 

• An aggregate net credit risk capital 

requirement on the single-family whole 

loans and guarantees underlying the 

CRT of 275 bps; 

• Aggregate expected losses on the 

single-family whole loans and 

guarantees underlying the CRT of 25 

bps; and 

• 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. 


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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 fixedrate 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: 

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 


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33360 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

concentration risk. Further, the singlefamily 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: 

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 prespecified 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 


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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 §§ 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 NonPerforming 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, reperforming 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 reperforming 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 singlefamily 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 MaeGuaranteed Single-Family 

Mortgage-Backed Securities 

Enterprise and Ginnie Mae singlefamily 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? 


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d. Operational Risk 

This section corresponds to Proposed 

Rule §§ 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 singlefamily 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 §§ 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 SINGLEFAMILY WHOLE LOANS AND GUARANTEES AS OF SEPTEMBER 30, 2017—BY LOAN CATEGORY * 

Capital 

requirement 

($billions) 

UPB 

($billions) 

Capital 

requirement 

(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 §§ 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 


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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 privatelabel 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 goingconcern 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 PRIVATELABEL 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 §§ 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 mortgagebacked 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-servicecoverage ratio (DSCR), loan-to-value 

ratio (LTV), payment performance, loan 

term, interest-only (IO), loan size, and 

special products, among others. 


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The proposed grid and multiplier 

framework is consistent with existing 

financial regulatory regimes and would 

thereby facilitate comparison and 

examination of the Enterprises’ riskbased 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, multiclass 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 §§ 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 multifamilyspecific stress scenario involves two 

parameters: 

• Net Operating Income (NOI), where 

NOI represents Gross Potential Income 

(gross rents) net of vacancy and 

operating expenses, and 

• 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. 


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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-interestonly, 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 


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Table 26: Multifamily FRM Base Credit Risk Capital (in bps) 

Acquisition LTV or MTML TV 

LTV 35% <LTV 45%<LTV 55%<LTV 65% <LTV 70%<LTV 75% <LTV 

Acquisition DSCR<l.OO 415 480 610 870 996 1119 1226 

DSCRor DSCR <1.15 359 413 520 735 843 943 1028 

MTMDSCR 

DSCR< 1.20 321 368 460 645 740 825 895 DSCR < 1.25 298 338 418 578 660 733 778 DSCR < 1.30 266 303 375 520 593 645 690 DSCR < 1.35 251 283 345 470 528 568 608 DSCR < 1.50 231 259 315 428 475 510 548 DSCR< 1.65 201 218 250 315 345 375 408 DSCR< 1.80 175 185 205 245 270 298 330 DSCR< 1.95 129 138 !55 190 210 235 258 DSCR< 2.10 118 122 130 163 180 204 221 DSCR< 2.25 106 110 118 149 165 188 203 

100 104 Ill 142 !58 180 194 
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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. 


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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 multifamilyspecific 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 (without Modification) .......................... 1.10. 

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 <= 2Yr ............................................. 0.75. 

2Yr < Loan Term <= 3Yr ............................................. 0.80. 

3Yr < Loan Term <= 4Yr ............................................. 0.85. 


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TABLE 28—MULTIFAMILY RISK MULTIPLIERS—Continued 

Risk factor Value or range Risk multiplier 

4Yr < Loan Term <= 5Yr ............................................. 0.90. 

5Yr < Loan Term <= 7Yr ............................................. 0.95. 

7Yr < Loan Term <= 10Yr ........................................... 1.00. 

Loan Term > 10Yr ....................................................... 1.15. 

Original Amortization Term ......... Amort. Term <= 20Yr .................................................. 0.70. 

20Yr < Amort. Term <= 25Yr ...................................... 0.80. 

25Yr < Amort. Term <= 30Yr ...................................... 1.00. 

Amort. Term > 30Yr ..................................................... 1.10. 

Original Loan Size ....................... Loan Size <= $3M ....................................................... 1.45. 

$3m < Loan Size <= $5M ............................................ 1.15. 

$5m < Loan Size <= $10M .......................................... 1.00. 

$10m < Loan Size <= $25M ........................................ 0.80. 

Loan Size > $25M ....................................................... 0.70. 

Special Products ......................... Government-Subsidized .............................................. 0.60. 

Not a Special Product ................................................. 1.00. 

Student Housing .......................................................... 1.15. 

Rehab/Value-Add/Lease-Up ........................................ 1.25. 

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: 

• 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), reperforming (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 reperforming 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, reperforming, and modified whole loans 

and guarantees would receive a risk 

multiplier greater than 1.0. 

• 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. 

• 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. 

• 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 


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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. 

• 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. 

• 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/leaseup, 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 


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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 MaeGuaranteed Multifamily MortgageBacked 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 §§ 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 creditguaranteed 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. 


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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

Counterparty rating 

CP haircut for 

concentration 

risk: Not high 

(%) 

CP haircut for 

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, 


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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 backend 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 losssharing. 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 seniorsubordinated 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 §§ 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 


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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 fixedand 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 MaeGuaranteed Multifamily MortgageBacked Securities 

Enterprise- and Ginnie Maeguaranteed 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 Maeguaranteed 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 §§ 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 §§ 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 


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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—Continued 

Capital requirement 

$billions bps Share 

(%) 

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 

requirement 

($billions) 

UPB 

($billions) 

Capital 

requirement 

(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 § 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 nonGinnie 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 goingconcern 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 § 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. 


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41Adjusted 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. 

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 lossabsorbing 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 riskweighted 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: 

• 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); 

• 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

• 20 percent (8 percent × 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 

• 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 postconservatorship 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. 


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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 goingconcern 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 goingconcern 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 


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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 § 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 § 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 offbalance 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 nontrust 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 procyclicality 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 


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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-creditguarantee-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. 


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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 riskbased 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 riskbased 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 riskweighted 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 


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42The 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. 

43The failure or takeover rate was 25% for 4– 

4.5% capital, 40% for 4.5%–5% capital, and 13% 

for 5–5.5% capital. 

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 tenyear 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-ormore-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 twonotch 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 riskbased capital group. 

It was clear from the analysis of credit 

rating downgrades that considerably 

better outcomes for depository 

institutions were associated with a riskbased 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 riskbased 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 riskbased 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. 

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 riskbased 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 alltime 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. 


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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 noneconomic risks that are typically not 

captured in a risk-based capital 

framework. For example, there is a 

mismatch with risk-based capital being 


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44 ‘‘An underlying cause of the global financial 

crisis was the build-up of excessive on- and offbalance 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. 

45This authority is discussed in greater detail in 

section II.F. 

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 noneconomic 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 riskbased 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 riskbased 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 procyclicality risks. The 1.5 percent 

requirement is also calibrated to be 

lower than the proposed aggregate riskbased 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. 

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 riskbased capital requirements by regulation 

or order as determined to be 

appropriate, including as a result of procyclical concerns.45

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 


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$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 riskbased 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 

requirement 

($billions) 

Capital 

requirement 

($billions) 

Capital 

requirement 

($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 Less Going-Concern Buffer ... 66% 86% 73% 

Net Credit Risk Capital Requirement * ........................................................................................ $70.5 $41.5 $112.0 

Bifurcated Alternative as % of Net Credit Risk Capital Requirement ......................................... 86% 104% 92% 

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 Requirement ........................ 102% 137% 114% 

* 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 onbalance sheet assets (under thenapplicable 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 mortgagebacked 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 matchfunded 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. 


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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 singlefamily 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 passthrough 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’ singlefamily 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 singlefamily 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 


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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 riskbased 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 procyclicality 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 riskinsensitive 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 risklevel 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 riskbased 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— 


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46Federal 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. 

47The bifurcated alternative would also assign 

the 1.5 percent minimum leverage ratio to assets 

categorized under accounting standards as offbalance 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. 

once through the cost of holding more 

capital than required under the riskbased 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 riskbased 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 riskbased 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

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. 

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 riskbased 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 


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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 postCRT 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 misestimations 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 § 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 lossabsorbing 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 


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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).’’ 

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 lossabsorbing 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 timeintensive. 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 riskbased 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. 

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 riskbased 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 riskbased 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 


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49 12 U.S.C. 4612(e). 

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 decisionmaking 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. 

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 

■ 1. The authority citation for part 1206 

continues to read as follows: 

Authority: 12 U.S.C. 4516. 

■ 2. Amend § 1206.2 by revising the 

definition of ‘‘Total exposure’’ to read as 

follows: 

§ 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 

■ 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 riskbased 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 singlefamily 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. 


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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 riskbased 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 riskbased 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. 

§ 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 


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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 mortgagebacked 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$_CMBS ................. Credit and market risk capital 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. 


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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. 

§ 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. 

§ 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. 

§ 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 §§ 1240.5 through 1240.23; 

(b) Private-label securities (PLS) as 

provided in §§ 1240.24 through 1240.29; 

(c) Multifamily loans, guarantees, and 

related securities as provided in 

§§ 1240.30 through 1240.45; 

(d) Non-Enterprise and non-Ginnie 

Mae Commercial Mortgage Backed 

Securities (CMBS) as provided in 

§ 1240.46; 

(e) Other assets and exposures as 

provided in § 1240.47; and 


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33394 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

(f) Unassigned activities as provided 

in § 1240.48. 

§ 1240.5 Single-family whole loans, 

guarantees, and related securities riskbased 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 §§ 1240.6 through 1240.16; 

(b) A market risk capital requirement 

for single-family whole loans and 

securities having market exposure as 

provided in §§ 1240.17 through 1240.18; 

(c) An operational risk capital 

requirement as provided in §§ 1240.19 

through 1240.20; and 

(d) A going-concern buffer 

requirement as provided in §§ 1240.21 

through 1240.22. 

§ 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 singlefamily 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 § 1240.7. 

(3) Determine the base credit risk 

capital requirement using the assigned 

single-family loan segment, as specified 

in § 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 

§ 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 § 1240.10. 

(6) Determine the reduction of capital 

from the gross credit risk capital 

requirement due to the presence of loanlevel credit enhancement benefit, as 

specified in § 1240.11. 

(7) Determine the reduction in loanlevel credit enhancement benefit due to 

counterparty risk for the credit 

enhancement counterparty, as specified 

in § 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 § 1240.13. 

(9) Determine the aggregate net credit 

risk capital requirement for singlefamily whole loans and guarantees, as 

specified in § 1240.13. 

(10) Determine the capital relief from 

single-family CRTs, as specified in 

§§ 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 singlefamily 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

Variable Definition/logic Acceptable values Treatment of missing or 

unacceptable values 

Back-end Debt-to-Income 

(DTI) Ratio.

DTI is calculated as the 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.

0% < DTI < 100% ............. Set to 42%. 

Loan-level Credit Enhancement Types.Types of loan-level credit enhancement that provide 

credit protection to the Enterprises for conventional 

single-family whole loans. Loan-level credit enhancements are typically used to meet the Charter 

requirements for loans with LTVs greater than 80%.

Participation Agreements, 

Repurchase or replacement Agreements, Recourse and Indemnification Agreements, Mortgage Insurance, Not Applicable.

Not Applicable. 

Streamlined Refi .................. Indicator for a loan that was refinanced through one of 

an Enterprise’s streamlined refinance programs, including, for example Home Affordable Refinance 

Program (HARP), Relief Refi and Refi-Plus.

Yes, No .............................. No. 

Interest-Only (IO) ................. A loan that requires only payment of interest without 

any principal amortization during all or part of the 

loan term.

Yes, No .............................. Yes. 


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TABLE 1 TO PART 1240—SINGLE-FAMILY WHOLE LOANS AND GUARANTEES DATA INPUTS—Continued 

Variable Definition/logic Acceptable values Treatment of missing or 

unacceptable values 

Loan Age ............................. Loan age is calculated as the difference in months between the origination month and the month of the 

reporting date.

0 months <= Loan Age <= 

500 months.

If the difference in months 

between the origination 

month and the month of 

the 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 documentation used to underwrite 

the loan.

No Documentation, Low 

Documentation, Full 

Documentation.

Set to No Documentation. 

Loan Purpose ...................... Purpose of the mortgage at origination ........................ Purchase, Cashout Refinance, Rate/Term Refinance.Set to Cashout Refinance. 

Mark-to-Market Loan-toValue (MTMLTV) Ratio.MTMLTV is calculated as ..............................................

UPB/((UPBOriginal/OLTV) × house_price_growth_factor) 

Special instructions for determining house_price_

growth_factor: 

• Use the FHFA Purchase Only State-Level House 

Price Index (HPI).

• Use the USA HPI for Puerto Rico and the Virgin 

Islands.

• Use the Hawaii HPI for Guam. 

• If a loan was originated before 1991, use an Enterprise’s proprietary HPI.

• If an HPI series ends before the reporting date, 

keep the HPI series constant (flat line).

• Use geometric interpolation to convert quarterly 

HPI data to monthly HPI data.

• 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.

0% < MTMLTV <= 300% .. Set MTMLTV to 300% if 

any of the following conditions apply: 

• The calculated 

MTMLTV is less than or 

equal to 0. 

• The calculated 

MTMLTV is greater than 

300%. 

Market Value ....................... The value of the loan used to inform an Enterprise’s 

fair value disclosures.

............................................ Set to UPB. 

Months since Last Delinquency.For re-performing loans, months since last delinquency is calculated as the difference in months between the ending date of the last delinquency period 

and the reporting date.

Non-negative integer ......... Set to 0. 

Months since Last Modification.For modified loans, months since last modification is 

calculated as the difference in months between the 

effective date of the modification and the reporting 

date.

Non-negative integer ......... Set to 0. 

Mortgage Insurance (MI) 

Cancellation Feature.

Mortgage insurance is cancellable if coverage 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.

Cancellable, NonCancellable.Set to Cancellable. 

MI Coverage Percent .......... The percentage of the sum of UPB, lost interest and 

foreclosure costs used to determine the benefit 

under a mortgage insurance policy.

0% <= MI Coverage Percent <= 100%.Set to 0%. 

Number of Borrowers .......... The number of borrowers on the mortgage note .......... Multiple borrowers, One 

borrower.

Set to One borrower. 

Number of Missed Payments.For delinquent loans, the number of missed payments, 

measured in months, as of the reporting date.

Non-negative integer ......... Set to 7. 

Occupancy Type .................. The borrowers’ intended use of the property ................ Investment, Owner Occupied, Second Home.Set to Investment. 

Original Credit Score ........... The borrower’s credit score as of the origination date 

If there are credit scores from multiple credit repositories for a borrower, use the following logic to determine a single Original Credit Score: 

300 <= Original Credit 

Score <= 850.

Set to 600. 

• If there are credit scores from two repositories, 

take the lower credit score.

• If there are credit scores from three repositories, 

use the middle credit score.

• 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: 

• Using the logic above, determine a single credit 

score for each borrower.


daltland on DSKBBV9HB2PROD with PROPOSALS2
33396 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

TABLE 1 TO PART 1240—SINGLE-FAMILY WHOLE LOANS AND GUARANTEES DATA INPUTS—Continued 

Variable Definition/logic Acceptable values Treatment of missing or 

unacceptable values 

• Select the lowest single credit score across all 

borrowers.

Original Loan-to-Value 

(OLTV).

OLTV is calculated as the ratio between the original 

loan amount and the lesser of appraised value or 

sale price.

0% < OLTV <= 300% ........ Set OLTV to 300% if any 

of the following conditions apply: 

• The calculated OLTV 

is less than or equal to 0. 

• The calculated OLTV 

is greater than 300%. 

• Both the sales price 

and appraised value are 

missing. 

Origination Channel ............. Source of the loan ......................................................... Retail, Third-Party Origination (TPO) (includes 

Broker and Correspondent).

Set to TPO. 

Payment Change from 

Modification.

The change in the monthly payment resulting from a 

permanent loan modification.

Payment Change from Modification is calculated as: 

100% * (post-modification monthly payment/pre-modification monthly payment¥1).

If the modified loan has an adjustable or step rate feature, the post-modification monthly payment is calculated using the initial modified rate. The Payment 

Change from Modification is not updated subsequent to any rate resets.

¥80% < Payment Change 

from Modification < 50%.

Set to 0% if missing. If the 

change in the monthly 

payment resulting from a 

permanent loan modification is greater than or 

equal to 50%, set Payment Change from Modification to 49%. If the 

change in the monthly 

payment resulting from a 

permanent loan modification less than or 

equal to ¥80%, set Payment Change from Modification to ¥79%. 

Previous Maximum Delinquency.For re-performing loans, the maximum number of 

months delinquent at any point in the prior 36 

months.

Non-negative integer ......... Set to 6 months. 

Product Type ....................... The mortgage product type as of the loan’s origination 

date.

FRM 30, FRM 20, FRM 

15, ARM 1/1.

Set to ARM 1/1. 

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 the property .......................... Single-family 1-Unit, Single-family 2–4 Units, 

Condominium, Manufactured Home.

Set to Single-family 2–4 

Units. 

Refreshed Credit Score ....... The borrower’s credit score as of the reporting date. If 

there are credit scores from multiple credit repositories for a borrower, use the following logic to determine a single Refreshed Credit Score: 

• If there are credit scores from two repositories, 

take the lower credit score.

300 <= Refreshed Credit 

Score <= 850.

If a refreshed credit score 

is not available, use the 

most recent score. If no 

credit score is available 

set the credit score to 

600. 

• If there are credit scores from three repositories, use the middle credit score.

• 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: 

• Using the logic above, determine a single credit 

score for each borrower.

• Select the lowest single credit score across all 

borrowers.


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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33397 

TABLE 1 TO PART 1240—SINGLE-FAMILY WHOLE LOANS AND GUARANTEES DATA INPUTS—Continued 

Variable Definition/logic Acceptable values Treatment of missing or 

unacceptable values 

Subordination (Second lien 

Original LTV).

The ratio of the original loan amount of the second 

lien to the lesser of appraised value or sale price.

0% <= Subordination <= 

80%.

Set to 80% if greater than 

80%. 

Unpaid Principal Balance 

(UPB).

The remaining unpaid principal balance on the loan as 

of the reporting date.

$0 < UPB < $2,000,000 .... Set to $45,000. 

(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

Variable Definition/logic Acceptable values 

Treatment of 

missing or 

unacceptable 

values 

Counterparty Name .................... The name of the counterparty.

Counterparty Rating .................... Counterparty rating as defined in Table 3. An Enterprise should 

assign the counterparty rating that most closely aligns to the 

assessment of the counterparty from the Enterprise’s internal 

counterparty risk framework.

1 .............................

2. 

3. 

4. 

5. 

6. 

7. 

Set to 8. 

8.

Mortgage Concentration Risk ..... An Enterprise’s 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.

High, Not High ....... Set to High. 

(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. 


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33398 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

TABLE 4 TO PART 1240—DATA INPUTS PROVIDED BY FHFA—Continued 

Item Description 

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. 

§ 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 singlefamily loan segment. The single-family 

loan segments are: New Origination 

Loan; Performing Seasoned Loan; NonModified Re-Performing Loan (RPL); 

Modified RPL; Non-Performing Loan 

(NPL). 

(b) The definitions for the singlefamily 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 ............ • Loan age less than or equal to 5 months, and 

• Never delinquent. 

Excludes: 

• Streamlined Refi loans. 

Performing Seasoned Loan ... • Loan age greater than 5 months, and 

• Never delinquent. 

Also includes: 

• Newly funded Streamlined Refi loans. 

• Loans that were delinquent, were not modified or put on a repayment plan, and have made 48 consecutive 

payments as of the reporting date. 

• 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 .................. • Performing, 

• Had a prior delinquency, and 

• Never modified or entered a repayment plan. 

Excludes: 

• Loans that have made 48 consecutive payments as of the reporting date. 

• 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 ......................... • Performing and 

• Modified or entered into a repayment plan. 

NPL ........................................ • 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. 


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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33399 

§ 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 


daltland on DSKBBV9HB2PROD with PROPOSALS2EP17JY18.015</GPH>
33400 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

(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. 


daltland on DSKBBV9HB2PROD with PROPOSALS2EP17JY18.016</GPH>
Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33401 

(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. 


daltland on DSKBBV9HB2PROD with PROPOSALS2EP17JY18.017</GPH>
(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 

using the minimum of the Months Since 

value in the cell in Table 9 determined 

the loan. 

Last Delinquency and the MTMLTV of 

Last Modification and Months Since 


EP17JY18.018</GPH>daltland on DSKBBV9HB2PROD with PROPOSALS2

Table 8 to Part 1240: Single-family Non-Modified RPL BaseCapitalbps 

30%< 60%< 70%< 75%< 80%< 85%< 90%< 95%< 

MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV 

80% 100% 

0< 

Months 8 122 315 433 525 658 763 843 929 

3 

Months 3< 

Since Last Months 7 88 245 340 421 522 623 708 791 

Delinquency 12 

12 < 

Months 6 67 202 285 353 431 523 607 693 

36 

36 < 

Months 8 46 132 198 285 349 447 550 642 

48 
(e) Single-family NPL BaseCapitalbps

each loan classified as an NPL, 

is shown in Table 10 to part 1240. For 

BaseCapitalbps is the value in the cell in 

Table 10 determined using the Number of the loan. 

of Missed Payments and the MTMLTV 


EP17JY18.019</GPH>daltland on DSKBBV9HB2PROD with PROPOSALS2

Table 9 to Part 1240: Single-Family Modified RPL BaseCapitalbps 

30%< 60%< 70%< 75%< 80%< 85%< 90%< 95%< 

MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV MTMLTV 

80% 100% 

0< 

Months 14 195 474 613 715 806 904 993 1061 

Minimum of 3 

(!)Months 3< 

Since Last Months 13 153 388 506 593 678 776 868 946 

Modification 12 

and(2) 12 < 

Months Since Months 12 119 314 415 493 576 671 767 849 

Last 36 

Delinquency 36 < 

Months II 84 220 313 425 500 611 733 830 

48 
33404 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

BILLING CODE 8070–01–C 

§ 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. 


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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33405 

TABLE 11 TO PART 1240—SINGLE-FAMILY RISK MULTIPLIERS

Risk factor Value or range 

Risk multipliers by single-family loan segment 

New 

origination 

loan 

Performing 

seasoned 

loan 

Non-modified 

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 

Home.

1.0 1.0 1.0 1.0 1.0 

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 ............................

TPO ....................................

1.0 

1.1 

1.0 

1.1 

1.0 

1.1 

1.0 

1.1 

1.0 

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 × Second Lien).No subordination ................

30% < OLTV <= 60% and 

0% < subordination <= 

5%.

1.0 

1.1 

1.0 

1.1 

1.0 

0.8 

1.0 

1.0 

........................

........................

30% < OLTV <= 60% and 

subordination > 5%.

1.5 1.5 1.1 1.2 ........................

OLTV > 60% and 0% < 

subordination <= 5%.

1.1 1.1 1.2 1.1 ........................

OLTV > 60% and subordination > 5%.1.4 1.4 1.5 1.3 ........................

Loan Age ............................. Loan Age <= 24 months .... ........................ 1.0 ........................ ........................ ........................

24 months < Loan Age <= 

36 months.

........................ 0.95 ........................ ........................ ........................

36 months < Loan Age <= 

60 months.

........................ 0.80 ........................ ........................ ........................

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 ............

No Documentation or Low 

Documentation.

........................ 1.0 

1.3 

1.0 

1.3 

1.0 

1.2 

........................

........................

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 

Score < 640.

........................ ........................ 1.3 1.2 ........................

640 <= Refreshed Credit 

Score < 660.

........................ ........................ 1.2 1.1 ........................

660 <= Refreshed Credit 

Score < 700.

........................ ........................ 1.0 1.0 ........................

700 <= Refreshed Credit 

Score < 720.

........................ ........................ 0.7 0.8 ........................

720 <= Refreshed Credit 

Score < 740.

........................ ........................ 0.6 0.7 ........................

740 <= Refreshed Credit 

Score < 760.

........................ ........................ 0.5 0.6 ........................

760 <= Refreshed Credit 

Score < 780.

........................ ........................ 0.4 0.5 ........................


daltland on DSKBBV9HB2PROD with PROPOSALS2
33406 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

TABLE 11 TO PART 1240—SINGLE-FAMILY RISK MULTIPLIERS—Continued 

Risk factor Value or range 

Risk multipliers by single-family loan segment 

New 

origination 

loan 

Performing 

seasoned 

loan 

Non-modified 

RPL 

Modified 

RPL NPL 

Refreshed Credit Score >= 

780.

........................ ........................ 0.3 0.4 ........................

Payment change from modification.Payment Change >= 0% ....

¥20% <= Payment 

Change < 0%.

........................

........................

........................

........................

........................

........................

1.1 

1.0 

........................

........................

¥30% <= Payment 

Change < ¥20%.

........................ ........................ ........................ 0.9 ........................

Payment Change < ¥30% ........................ ........................ ........................ 0.8 ........................

Previous Maximum Delinquency (in the last 36 

months).

0–1 Months ........................

2–3 Months ........................

4–5 Months ........................

6+ Months ..........................

........................

........................

........................

........................

........................

........................

........................

........................

1.0 

1.2 

1.3 

1.5 

1.0 

1.1 

1.1 

1.1 

........................

........................

........................

........................

Refreshed Credit Score for 

NPLs.

Refreshed Credit Score < 

580.

........................ ........................ ........................ ........................ 1.2 

580 <= Refreshed Credit 

Score < 640.

........................ ........................ ........................ ........................ 1.1 

640 <= Refreshed Credit 

Score < 700.

........................ ........................ ........................ ........................ 1.0 

700 <= Refreshed Credit 

Score < 720.

........................ ........................ ........................ ........................ 0.9 

720 <= Refreshed Credit 

Score < 760.

........................ ........................ ........................ ........................ 0.8 

760 <= Refreshed Credit 

Score < 780.

........................ ........................ ........................ ........................ 0.7 

Refreshed Credit Score >= 

780.

........................ ........................ ........................ ........................ 0.5 

(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 × Occupancy 

Type Multiplier × Property Type 

Multiplier × Number of Borrowers 

Multiplier × Third-Party 

Origination Channel Multiplier × 

Back-End Debt-to-Income 

Multiplier × Product Type 

Multiplier × Loan Size Multiplier × 

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 × Occupancy 

Type Multiplier × Property Type 

Multiplier × Number of Borrowers 

Multiplier × Third-Party 

Origination Channel Multiplier × 

Back-End Debt-to-Income 

Multiplier × Product Type 

Multiplier × Loan Size Multiplier × 

Subordination Multiplier × Loan 

Age Multiplier × Cohort Burnout 

Multiplier × Interest-Only 

Multiplier × Loan Documentation 

Level Multiplier × Streamlined Refi 

Multiplier. 

(3) For each loan classified as a NonModified 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 × Occupancy 

Type Multiplier × Property Type 

Multiplier × Number of Borrowers 

Multiplier × Third-Party 

Origination Channel Multiplier × 

Back-End Debt-to-Income 

Multiplier × Product Type 

Multiplier × Loan Size Multiplier × 

Subordination Multiplier × Loan 

Age Multiplier × Interest-Only 

Multiplier × Loan Documentation 

Level Multiplier × Streamlined Refi 

Multiplier × Refreshed Credit Score 

for RPLs Multiplier × 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 × Occupancy 

Type Multiplier × Property Type 

Multiplier × Number of Borrowers 

Multiplier × Third-Party 

Origination Channel Multiplier × 

Back-End Debt-to-Income 

Multiplier × Product Type 

Multiplier × Loan Size Multiplier × 

Subordination Multiplier × Loan 

Age Multiplier × Interest-Only 

Multiplier × Loan Documentation 

Level Multiplier × Streamlined Refi 

Multiplier × Refreshed Credit Score 

for RPLs Multiplier × Payment 

change from modification 

Multiplier × 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 × Property Type 

Multiplier × Number of Borrowers 

Multiplier × Product Type 

Multiplier × Loan Size Multiplier × 

Prior Maximum Delinquency 

Multiplier × Refreshed Credit Score 

for NPLs Multiplier. 


daltland on DSKBBV9HB2PROD with PROPOSALS2
Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 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. 

§ 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 × 

TotalCombRiskMult, 3,000) 

§ 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 NonModified RPL loan segments where MI 

Cancellation Feature is set to NonCancellable. 

TABLE 12 TO PART 1240—CEMultipliers FOR NEW ORIGINATION LOAN, PERFORMING SEASONED LOAN, AND NONMODIFIED 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 Guide-level Coverage ........... 80% < OLTV <= 85% and MI Coverage Percent = 6% ............

85% < OLTV <= 90% and MI Coverage Percent = 12% ..........

0.846 

0.701 

90% < OLTV <= 95% and MI Coverage Percent = 25% .......... 0.408 

95% < OLTV <= 97% and MI Coverage Percent = 35% .......... 0.226 

OLTV > 97% and MI Coverage Percent = 35% ........................ 0.184 

30 Year Amortizing Loan with Guide-level Coverage ................ 80% < OLTV <= 85% and MI Coverage Percent = 12% ..........

85% < OLTV <= 90% and MI Coverage Percent = 25% ..........

0.706 

0.407 

90% < OLTV <= 95% and MI Coverage Percent = 30% .......... 0.312 

95% < OLTV <= 97% and MI Coverage Percent = 35% .......... 0.230 

OLTV > 97% and MI Coverage Percent = 35% ........................ 0.188 

15/20 Year Amortizing Loan with Charter-level Coverage ......... 80% < OLTV <= 85% and MI Coverage Percent = 6% ............

85% < OLTV <= 90% and MI Coverage Percent = 12% ..........

0.846 

0.701 

90% < OLTV <= 95% and MI Coverage Percent = 16% .......... 0.612 

95% < OLTV <= 97% and MI Coverage Percent = 18% .......... 0.570 

OLTV > 97% and MI Coverage Percent = 20% ........................ 0.535 

30 Year Amortizing Loan with Charter-level Coverage .............. 80% < OLTV <= 85% and MI Coverage Percent = 6% ............

85% < OLTV <= 90% and MI Coverage Percent = 12% ..........

0.850 

0.713 

90% < OLTV <= 95% and MI Coverage Percent = 16% .......... 0.627 

95% < OLTV <= 97% and MI Coverage Percent = 18% .......... 0.590 

OLTV > 97% and MI Coverage Percent = 20% ........................ 0.558 

(2) Table 13 to part 1240 shows 

CEMultipliers for New Origination Loan, 

Performing Seasoned Loan, and NonModified RPL loan segments where MI Cancellation Feature is set to 

Cancellable. 

BILLING CODE 8070–01–P 


daltland on DSKBBV9HB2PROD with PROPOSALS2
(3) Table 14 to part 1240 shows 

CEMultipliers for the Modified RPL loan 

segment with 30-Year Post-Modification Year and 15/20 Year Amortizing Loan 

Feature is set to Cancellable. The 30 

Amortization when MI Cancellation 

original amortization terms. 

characteristics refer to pre-modification 


EP17JY18.021</GPH>daltland on DSKBBV9HB2PROD with PROPOSALS2

Table 13 to Part 1240: CEMultipliers for New Origination Loan, Performing Seasoned Loan, and No

Loan Segments when MI Cancellation Feature is set to Cancellable 

Loan Age (months) 

5< 12 < 24 < 36 < 48 < 60 < 72< 84 < 

Loan Age Loan Age Loan Age Loan Age Loan Age Loan Age Loan Age Loan Age Loan Age 

12 24 36 84 96 

15/20 Year 80% < OLTV <- 85% 0.997 0.998 1000 1000 1000 1000 1000 1000 1000 

Amortizing and MI 6% 

Loan with 85% < OL TV 90% 0.963 0.971 0.988 0.999 1000 1000 1000 1000 1000 

Guide-level and MI 12% 

Coverage 90% < OLTV <- 95% 0.826 0.853 0.912 0.973 0.996 1000 1000 1000 1000 

and MI 25% 

95% < OLTV <- 97% 0.732 0.765 0.848 0.936 0.986 0.998 1000 1000 1000 

and MI 35% 

OL TV> 97% and MI 0.630 0.673 0.762 0.865 0.945 0.980 0.996 1000 1000 

35% 

30 Year 80% < OLTV <- 85% 0.867 0.884 0.928 0.962 0.994 0.999 1000 1000 1000 

Amortizing and MI 12% 

Loan with 85% < OLTV <- 90% 0.551 0.584 0.627 0.679 0.785 0.893 0.950 0.986 0.998 

Guide-level and MI 25% 

Coverage 90% < OLTV <- 95% 0.412 0.440 0.456 0.484 0.547 0.654 0.743 0.845 0.932 

and MI 30% 

95% < OLTV <- 97% 0.322 0.351 0.369 0.391 0.449 0.535 0.631 0.746 0.873 

and lv1l Coverage= 35% 

OL TV> 97% and MI 0.272 0.295 0.314 0.353 0.410 0.462 0.515 0.607 0.756 

35% 

15/20 Year 80% < OL TV 85% 0.997 0.998 1000 1000 1000 1000 1000 1000 1000 

Amortizing and MI 6% 

Loan with 85% < OLTV <- 90% 0.963 0.971 0.988 0.999 1000 1000 1000 1000 1000 

Charter-level and MI 12% 

Coverage 90% < OLTV <- 95% 0.887 0.904 0.943 0.983 0.997 1000 1000 1000 1000 

and MI 16% 

95% < OLTV <- 97% 0.854 0.874 0.918 0.966 0.992 0.999 1000 1000 1000 

and MI 18% 

OL TV> 97% and MI 0.788 0.810 0.859 0.922 0.969 0.989 0.998 1000 1000 

Coverage= 20% 

30 Year 80% < OLTV <- 85% 0.934 0.943 0.964 0.981 0.997 0.999 1000 1000 1000 

Amortizing and J\1I Coverage= 6% 

Loan with 85% < OLTV <- 90% 0 780 0.795 0.819 0.845 0.896 0.948 0.976 0.993 0.999 

Charter-level and MI 12% 

Coverage 90% < OLTV <- 95% 0.679 0.690 0.703 0.719 0.755 0.813 0.861 0.916 0.963 

and MI 16% 

95% < OLTV <- 97% 0.642 0.652 0.662 0.676 0.708 0.756 0.806 0.866 0.933 

and MI 18% 

01. TV> 97% and MT 0.597 0.607 0.617 0.629 0.658 0.686 0.715 0.765 0.845 

20% 
Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33409 

(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. 


daltland on DSKBBV9HB2PROD with PROPOSALS2EP17JY18.023</GPH>
33410 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

BILLING CODE 8070–01–C (5) Table 16 to part 1240 shows 

CEMultipliers for NPLs. 


daltland on DSKBBV9HB2PROD with PROPOSALS2EP17JY18.024</GPH>
Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33411 

TABLE 16 TO PART 1240—CEMultipliers FOR NPLS

Original amortization term/coverage type Coverage category CEMultiplier 

15/20 Year Amortizing Loan with Guide-level Coverage ........... 80% < OLTV <= 85% and MI Coverage Percent = 6% ............ 0.893 

85% < OLTV <= 90% and MI Coverage Percent = 12% .......... 0.803 

90% < OLTV <= 95% and MI Coverage Percent = 25% .......... 0.597 

95% < OLTV <= 97% and MI Coverage Percent = 35% .......... 0.478 

OLTV > 97% and MI Coverage Percent = 35% ........................ 0.461 

30 Year Amortizing Loan with Guide-level Coverage ................ 80% < OLTV <= 85% and MI Coverage Percent = 12% .......... 0.813 

85% < OLTV <= 90% and MI Coverage Percent = 25% .......... 0.618 

90% < OLTV <= 95% and MI Coverage Percent = 30% .......... 0.530 

95% < OLTV <= 97% and MI Coverage Percent = 35% .......... 0.490 

OLTV > 97% and MI Coverage Percent = 35% ........................ 0.505 

15/20 Year Amortizing Loan with Charter-level Coverage ......... 80% < OLTV <= 85% and MI Coverage Percent = 6% ............ 0.893 

85% < OLTV <= 90% and MI Coverage Percent = 12% .......... 0.803 

90% < OLTV <= 95% and MI Coverage Percent = 16% .......... 0.775 

95% < OLTV <= 97% and MI Coverage Percent = 18% .......... 0.678 

OLTV > 97% and MI Coverage Percent = 20% ........................ 0.663 

30 Year Amortizing Loan with Charter-level Coverage .............. 80% < OLTV <= 85% and MI Coverage Percent = 6% ............ 0.902 

85% < OLTV <= 90% and MI Coverage Percent = 12% .......... 0.835 

90% < OLTV <= 95% and MI Coverage Percent = 16% .......... 0.787 

95% < OLTV <= 97% and MI Coverage Percent = 18% .......... 0.765 

OLTV > 97% and MI Coverage Percent = 20% ........................ 0.760 

(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 noncancellable 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 Guidelevel Coverage, set the CEMultiplier 

equal to the CEMultiplier for the Guidelevel 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 

§ 1240.14. 

(h) CEMultiplier for partial recourse 

and indemnification agreements shall be 

calculated using the methodology for 

calculating capital relief as provided in 

§ 1240.14. 

(i) CEMultiplier for participation 

agreements is set to 1.0. 

§ 1240.12 Counterparty Haircut for singlefamily whole loans and guarantees. 

(a) The amount by which credit 

enhancement lowers the 

GrossCreditRiskCapReqbps for singlefamily 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

Counterparty 

rating 

Mortgage concentration risk: Not high Mortgage concentration risk: High 

New originations, performing seasoned, 

and RPLs 

(%) NPLs 

(%) 

New originations, performing seasoned, 

and RPLs 

(%) NPLs 

(%) 

30 Year 

product 

20/15 Year 

product 

30 Year 

product 

20/15 Year 

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 


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33412 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

§ 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 × 

(1¥(1¥CEMultiplier) × 

(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 × 

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$. 

§ 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. Singlefamily 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 § 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. 

§ 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 singlefamily 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 singlefamily 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 singlefamily 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%) in the single-family 

CRT. For a given tranche, CM% is the 

percentage of the tranche sold in the 

capital markets. CM% 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%) in the singlefamily CRT. For a given tranche, LS% is 

the percentage of the tranche that is 

either insured, reinsured, or afforded 

coverage through lender reimbursement 

of credit losses of principal. LS% 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 singlefamily 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 singlefamily whole loans and guarantees 


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underlying the given pool group 

assuming a 0% CPHaircut as follows: 

(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: 

(6) CRT expected losses. An 

Enterprise must have accurate data on 

total lifetime net expected credit risk 

losses (PGELbps) on the whole singlefamily 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 singlefamily 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 singlefamily 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 singlefamily 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 singlefamily 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% that is insured, reinsured, or 

afforded coverage through lender 

reimbursement of credit losses of 

principal by the given counterparty 

(CntptyShare%). CntptyShare% 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 singlefamily CRT loss timing factor (CRTLT%) 

for each pool group. CRTLT% is 

expressed as a value between 0% and 

100%. To calculate the CRTLT%, 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%); 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%). 

(iii) An Enterprise must use the 

following method to calculate CRTLT%

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, 


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33414 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

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% = (CRTLT15 * CRTF15%) + 

(CRTLT80Not15 * CRT80NotF15%) 

+ (CRTLTGT80Not15 * (1 ¥ 

CRT80NotF15% ¥ CRTF15%)) 

(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

CRTMthstoMaturity: (#1) 

Number of months from the singlefamily CRT’s original closing date 

(or effective date) to the maturity 

date on the CRT 

CRT loss timing factors 

CRTLT15: (#2) 

CRTLT for pool groups backed by 

single-family whole loans and 

guarantees with original 

amortization terms 

< = 189 months 

(%) 

CRTLT80Not15: (#3) 

CRTLT for pool groups backed by 

single-family whole loans and 

guarantees with original 

amortization terms 

> 189 months and OLTVs 

< = 80 (%) 

CRTLTGT80Not15: (#4) 

CRTLT for pool groups backed by 

single-family whole loans and 

guarantees with original 

amortization terms 

> 189 months and 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: 

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% * TCRCbps * CRTLT%

LSTCRCbps = LS% * TCRCbps * CRTLT%

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 


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

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 singlefamily CRT, an Enterprise must 

calculate aggregate capital relief 

(PGCapReliefbps) across all tranches and 

counterparties associated with the given 

pool group using the following formula: 

(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: 

§ 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: 

§ 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 × 

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$. 

§ 1240.18 Market risk capital requirement 

for single-family securities. 

(a) Enterprise- and Ginnie Maeguaranteed 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$: 


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33416 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

§ 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 × 

0.0008 

(2) Otherwise, if the Enterprise holds 

only market risk the calculation is as 

follows: 

OperationalRiskCapReq$ = Market 

Value × 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$. 

§ 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 × 0.0008 

(c) The aggregate operational risk 

capital requirement for all SFMBS 

(OperationalRiskCapReq$_SFMBS) is the 

sum of each security’s 

OperationalRiskCapReq$. 

§ 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 × 0.0075 

(2) Otherwise, if the Enterprise holds 

only market risk the calculation is as 

follows: 

GCBufferReq$ = Market Value × 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$. 

§ 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 × 

0.0075 

(c) The aggregate going-concern buffer 

requirement for all SFMBS 

(GCBufferReq$_SFMBS) is the sum of each 

security’s GCBufferReq$. 

§ 1240.23 Aggregate risk-based capital 

requirement for single-family whole loans, 

guarantees, and related securities. 

(a) As provided in § 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 + 


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GCBufferReq$_SFMBS ¥ 

TotalCapRelief$_SFWL

§ 1240.24 Private-label securities riskbased 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 § 1240.25; 

(b) A market risk capital requirement 

as provided in § 1240.26; 

(c) An operational risk capital 

requirement as provided in § 1240.27; 

and 

(d) A going-concern buffer 

requirement as provided in § 1240.28. 

§ 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 § 217.43(a) through 

(d) of this title, as of the effective date 

of this part, with the following 

exceptions: 

(1) Excludes § 217.43(b)(2)(v)(A) 

through (B) of this title: 

(2) Assigns the weighted-average total 

capital requirement of the underlying 

exposures KG; 

(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) KG is the weighted-average total 

capital requirement of the underlying 

exposures. KG 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) KG and W are used to calculate KA, 

the augmented value of KG, which 

reflects the observed credit quality of 

the underlying exposures. KA is defined 

in paragraph (g) of this section. The 

values of parameters ATCH and DTCH, 

relative to KA, 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 KA, 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 KA, 

the Enterprise must calculate the risk 

weight in accordance with paragraph (g) 

of this section. 

(3) When ATCH is less than KA and 

DTCH is greater than KA, 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 

(ii) The weight assigned to 1,250 

percent times KFHFA SSFA equals 


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33418 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

(iii) The risk weight will be set equal 

to 

(g) FHFA SSFA equation involves the 

following steps: 

(1) An Enterprise must define the 

following parameters: 

(2) An Enterprise must calculate 

KFHFA SSFA according to the following 

equation: 

(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 × 8% × 

10,000 

(i) Determine the credit risk capital 

requirement for a PLS in dollar terms 

(CreditRiskCapReq$) as follows: 

CreditRiskCapReq$ = Market Value × 

CreditRiskCapReqbps/10,000 

§ 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 × 

SpreadDuration 

(c) The MarketRiskCapReq$ is 

calculated as follows: 

MarketRiskCapReq$ = Market Value × 

MarketRiskCapReqbps/10,000 

§ 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 × 0.0008 

§ 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 × 0.0075 

§ 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. 


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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33419 

§ 1240.30 Multifamily whole loans, 

guarantees, and related securities riskbased 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 §§ 1240.31 through 

1240.38; 

(b) A market risk capital requirement 

for multifamily whole loans and 

securities with market exposure, as 

provided in §§ 1240.39 through 1240.40; 

(c) An operational risk capital 

requirement, as provided in §§ 1240.41 

through 1240.42; and 

(d) A going-concern buffer 

requirement, as provided in §§ 1240.43 

through 1240.44. 

§ 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 § 1240.32. 

(3) Determine BaseCapitalbps for each 

whole loan and guarantee using the 

loan’s assigned multifamily loan 

segment and the appropriate segmentspecific table, as specified in § 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 

§ 1240.34. 

(5) Calculate GrossCreditRiskCap 

Reqbps for each whole loan and 

guarantee by multiplying BaseCapitalbps

by TotalCombRiskMult, as specified in 

§ 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 § 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 

§§ 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

Variable Definition/logic Acceptable value Treatment of missing or 

unacceptable value 

Acquisition Debt-Service Coverage Ratio 

(DSCR).

The Debt-Service-Coverage Ratio is the ratio 

of Net Operating Income (NOI) to the 

scheduled mortgage payment. If NOI is unavailable, use Net Cash Flow (NCF).

Acquisition DSCR is the DSCR reported at 

the time the loan is acquired.

For interest-only loans, use fully amortizing 

acquisition DSCR when determining 

BaseCapitalbps.

Greater than or equal 

to 0.

In a case where the acquisition DSCR is not 

available, use DSCR at the time the loan 

was underwritten as a substitute. For a 

newly acquired loan, the origination DSCR 

can be used as a proxy for the acquisition 

DSCR if the loan is acquired within six 

months of acquisition and an 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 at the time a loan 

is acquired.

Greater than or equal 

to 0.

Where the acquisition LTV is not available, 

use 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 the period that 

would 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.

Non-negative integer 

in years.

If missing, use 31 years. 

Interest-Only (IO) ......... A loan that requires only payment of interest 

without any principal amortization during all 

or part of the loan term.

Yes, No ...................... Yes. 

Loan Term ................... The loan term is the period between origination and final loan payment (which may be 

a balloon payment) as stated in the loan 

origination documents.

Non-negative integer 

in years.

If missing, use 11 years. 


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33420 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

TABLE 19 TO PART 1240—MULTIFAMILY WHOLE LOANS AND GUARANTEES DATA INPUTS—Continued 

Variable Definition/logic Acceptable value Treatment of missing or 

unacceptable value 

Mark-to-Market DSCR 

(MTMDSCR).

MTMDSCR is the DSCR stated on the most 

recent property operating statement. For interest-only loans, use fully amortizing 

MTMDSCR when determining 

BaseCapitalbps.

Greater than or equal 

to 0.

In a case where MTMDSCR is not available, 

the last observed DSCR can be marked to 

market using a property NOI index or an 

NOI estimate 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 Loanto-Value (MTMLTV) 

ratio.

MTMLTV is an estimate of the current LTV, 

derived by marking to market the acquisition LTV using a multifamily property value 

index or property value estimate based on 

NOI and cap rate indices.

Greater than or equal 

to 0.

If missing, mark to market using an index. If 

the index is not sufficiently granular, either 

because of its frequency or geography or 

with respect to a certain multifamily property type, use more geographically broad 

index or a recently estimated mark-to-market value. 

Market Value ............... The value of the loan reported in an Enterprise’s fair value disclosures...................................... UPB. 

Net Operating Income 

(NOI)/Net Cash Flow 

(NCF).

NOI is defined as the rental income generated by the property net of vacancy and 

property operating expenses. NCF is defined as NOI minus any below-the-line expenses, which usually include capital improvement reserves and leasing commissions.

Greater than or equal 

to 0.

Infer using origination LTV or origination 

DSCR. Alternatively, infer using actual 

MTMLTV or actual MTMDSCR. 

Original Loan Size ....... The original loan size is the dollar amount of 

the loan at origination.

Non-negative dollar 

value.

$3,000,000. 

Payment Performance The payment status or history of a multifamily 

loan.

Performing, Delinquent, Re-performing (without 

Modification), Modified.

If missing, set to Modified. 

Special Product ........... Multifamily loans that are Government-Subsidized, Student Housing, Rehab/ValueAdd/Lease-Up, Supplemental.Not a Special Product, 

Government-Subsidized, Student 

Housing, Rehab/ 

Value-Add/LeaseUp, Supplemental.

If missing, set to Rehab/Value-Add/Lease-Up. 

Unpaid Principal Balance (UPB$).The remaining unpaid principal balance on 

the loan as of the reporting date.

UPB > $0 ................... If missing, use $100,000,000. 

§ 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. 

§ 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 


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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33421 

(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. 


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33422 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

BILLING CODE 8070–01–C 

§ 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. 


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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33423 

TABLE 22 TO PART 1240—MULTIFAMILY RISK MULTIPLIERS—Continued 

Risk factor Value or range Risk multiplier 

Delinquent .................................................................... 1.10. 

Re-Performing (without Modification) .......................... 1.10. 

Modified ....................................................................... 1.20. 

Interest-Only ................................ No ................................................................................ 1.00. 

Yes (during the interest-only period) ........................... 1.10. 

Original/Remaining Loan Term in 

Years (Yr).

Loan Term <= 1Yr .......................................................

1Yr < Loan Term <= 2Yr .............................................

0.70. 

0.75. 

2Yr < Loan Term <= 3Yr ............................................. 0.80. 

3Yr < Loan Term <= 4Yr ............................................. 0.85. 

4Yr < Loan Term <= 5Yr ............................................. 0.90. 

5Yr < Loan Term <= 7Yr ............................................. 0.95. 

7Yr < Loan Term <= 10Yr ........................................... 1.00. 

Loan Term < 10Yr ....................................................... 1.15. 

Original Amortization Term ......... Amort. Term <= 20Yr .................................................. 0.70. 

20Yr < Amort. Term <= 25Yr ...................................... 0.80. 

25Yr < Amort. Term <= 30Yr ...................................... 1.00. 

Amort. Term < 30Yr ..................................................... 1.10. 

Original Loan Size ....................... Loan Size <= $3,000,000 ............................................ 1.45. 

$3,000,000 < Loan Size <= $5,000,000 ...................... 1.15. 

$5,000,000 < Loan Size <= $10,000,000 .................... 1.00. 

$10,000,000 < Loan Size <= $25,000,000 .................. 0.80. 

Loan Size < $25,000,000 ............................................ 0.70. 

Special Products ......................... Government-Subsidized .............................................. 0.60. 

Not a Special Product ................................................. 1.00. 

Student Housing .......................................................... 1.15. 

Rehab/Value-Add/Lease-Up ........................................ 1.25. 

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 × Interest-Only 

Multiplier × Original Loan Term 

Multiplier × Original Amortization 

Term Multiplier × Original Loan 

Size Multiplier × 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 × Interest-Only 

Multiplier × Remaining Loan Term 

Multiplier × Original Amortization 

Term Multiplier × Original Loan 

Size Multiplier × 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. 

§ 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 × 

TotalCombRiskMult 

§ 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 × 

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$. 


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33424 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

§ 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 § 1240.38. 

§ 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%) 

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% is the percentage of the tranche 

that is subject to lender loss sharing. 

MF_LS% 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%) for 

the multifamily CRT. For a given 

tranche, MF_MTLS% 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% 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%) in the multifamily 

CRT. For a given tranche, MF_S% is the 

percentage of the tranche sold in the 

capital markets. MF_S% 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% is the percentage of MF_

LS% or MF_MTLS% that the given 

counterparty covers. CntptyShare% 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. 


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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33425 

TABLE 23 TO PART 1240—CPHaircut FOR COUNTERPARTY RATING ON LENDER AND MULTIPLE TRANCHE LOSS SHARING

TRANSACTIONS

Counterparty rating 

CPHaircut for 

concentration 

risk: Not high 

(%) 

CPHaircut for 

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%

(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$¥Cntpty

Collat$],0) 

(iii) An Enterprise must determine 

counterparty credit risk in dollars 

(CntptyCreditRisk$). An Enterprise must 

use the following formula to calculate 

CntptyCreditRisk$: 

CntptyCreditRisk$ = CntptyExposure$ * 

(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$ = LenderCapital$ ¥ 

CntptyCreditRisk$

(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: 

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% * 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. 

(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: 

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% * 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: 


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33426 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

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. 

(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: 

§ 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 × 

0.0015 × 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$: 

§ 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 × 0.0100 × SpreadDuration 

(c) The aggregate market risk capital 

requirement for all MFMBS 

(MarketRiskCapReq$_MFMBS) is the sum 

of each security’s MarketRiskCapReq$: 

§ 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 × 

0.0008 

(2) Otherwise, if the Enterprise holds 

only market risk the calculation is as 

follows: 

OperationalRiskCapReq$ = Market 

Value × 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$. 


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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33427 

§ 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 × 0.0008 

(c) The aggregate operational risk 

capital requirement for MFMBS 

(OperationalRiskCapReq$_MFMBS) is the 

sum of each security’s 

OperationalRiskCapReq$. 

§ 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 × 0.0075 

(2) Otherwise, if the Enterprise holds 

only market risk the calculation is as 

follows: 

GCBufferReq$ = Market Value × 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$. 

§ 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 × 

0.0075 

(c) The aggregate going-concern buffer 

requirement for all MFMBS 

(GCBufferReq$_MFMBS) is the sum of each 

security’s GCBufferReq$. 

§ 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 goingconcern 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

§ 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 goingconcern 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 × 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: 

(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 × 0.0008 


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33428 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

(e) The aggregate operational risk 

capital requirement for CMBS 

(OperationalRiskCapReq$_CMBS) is the 

sum of each loan’s 

OperationalRiskCapReq$. 

(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 × 

0.0075 

(g) The aggregate going-concern buffer 

requirement for all CMBS 

(GCBufferReq$_CMBS) is the sum of each 

security’s GCBufferReq$. 

(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

§ 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 riskbased 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 × 0.076 

(ii) The aggregate market risk capital 

requirement for all Municipal Debt 

(MarketRiskCapReq$_MD) is the sum of 

each instrument’s MarketRiskCapReq$. 

(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 × 0.0008 

The aggregate operational risk capital 

requirement for municipal debt 

(OperationalRiskCapReq$_MD) is the 

sum of each instrument’s 

OperationalRiskCapReq$. 

(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 × 0.0075 

(ii) The aggregate going-concern buffer 

requirement for all municipal debt 

(GCBufferReq$_MD) is the sum of each 

security’s GCBufferReq$. 


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

(1) The dollar amount of the 

MarketRiskCapReq$ for a reverse 

mortgage loan is calculated as follows: 

MarketRiskCapReq$ = Market Value × 

0.05 

(2) The dollar amount of the 

MarketRiskCapReq$ for a reverse 

mortgage security is calculated as 

follows: 

MarketRiskCapReq$ = Market Value × 

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$: 

(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 × 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$. 

(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 × 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$. 

(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. Singlefamily rentals are multiple incomeproducing 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. 

§ 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 riskbased 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. 


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(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. 

§ 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 § 1240.4, is as follows: 

(b) RiskBasedCapReq$_TOTAL shall also 

include any capital requirements for 

Unassigned Activities. 

§ 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. 

§ 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] 

■ 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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