FINANCIAL STABILITY OVERSIGHT COUNCIL STATEMENT ON ACTIVITIES-BASED REVIEW OF 

SECONDARY MORTGAGE MARKET ACTIVITIES

The Council has conducted a review of the secondary mortgage market, which is an integral 

component of the U.S. housing finance system. Financial stress in the secondary mortgage 

market has the potential to affect the availability and terms of mortgage credit, and to affect the 

economy more broadly. The Council’s review focused in particular on the activities of Fannie 

Mae and Freddie Mac (the Enterprises) as the dominant private secondary market providers of 

liquidity through their purchase of mortgages for securitization and sale as guaranteed MBS.

In assessing potential risks to financial stability, the Council applied the framework for an 

activities-based approach described in the interpretive guidance on nonbank financial company 

determinations issued by the Council in December 2019. This framework provides that the 

Council will consult with relevant financial regulatory agencies, consider the risk profiles and 

business models of market participants engaging in the activities under evaluation, and take into 

account existing laws and regulations that may mitigate a potential risk to U.S. financial stability. 

The Council’s analysis considered: (1) how a potential risk to financial stability could be 

triggered from the Enterprises’ inability to provide secondary market liquidity; (2) how those 

stresses could be transmitted to financial markets or other market participants; (3) the impact on 

the financial system of the Enterprises’ inability to continue to provide secondary market 

liquidity; and, (4) the extent to which the financial system could be impaired in a manner that 

could harm the non-financial sector of the U.S. economy. 

The 2008 financial crisis demonstrated that financial stress at the Enterprises could limit their 

ability to provide reliable liquidity to the secondary market or perform their guarantee and other 

obligations on their MBS and other liabilities, with significant implications for the national 

housing finance markets, financial stability, and the broader economy. The Enterprises continue 

to play a central role in the national housing finance markets—acquiring nearly 50% of newly 

originated mortgages in both single-family and multifamily markets—and are two of the largest 

U.S. financial institutions. The Enterprises’ provision of secondary market liquidity generates 

significant interconnectedness among the Enterprises, banks, non-bank financial institutions, and 

other counterparties. Moreover, given their similar business models, risks at the Enterprises are 

highly correlated; if one Enterprise experiences financial distress, the other may as well. If the 

Enterprises were unable to provide liquidity to the secondary market, other market participants 

may be unable in the near- or medium-term to provide liquidity at the scale and pricing needed to 

ensure smooth market functioning and financial intermediation. As a result, any distress at the

Enterprises that affected their secondary mortgage market activities, including their ability to 

perform their guarantee and other obligations on their MBS and other liabilities, could pose a 

risk to financial stability, if risks are not properly mitigated.

FHFA has the responsibility to ensure that each Enterprise operates in a safe and sound manner 

and fosters liquid, efficient, competitive, and resilient national housing finance markets, and the 

authority to set and enforce appropriate rules to fulfill that responsibility. In preparation for the 

Enterprises’ exit from conservatorship, FHFA has been developing a more robust prudential 

regulatory framework for the Enterprises, including capital, liquidity, and stress testing 
requirements, supervision, and a credible resolution framework, to, among other things, address

the risk that an Enterprise’s default or other financial distress could have on the national housing

finance markets. FHFA recently proposed a new capital regulation (“Enterprise Regulatory 

Capital Framework,” June 30, 2020) that is intended to enhance the quality and quantity of 

required capital so as to ensure that each Enterprise is capitalized to remain a viable going 

concern both during and after a severe economic downturn and also to mitigate the potential risk 

to national housing finance markets posed by the Enterprise. The proposed Enterprise capital 

rule represents a significant step by FHFA to address the Council’s recommendation in its 2019 

Annual Report that FHFA continue to develop capital and other prudential requirements for the 

Enterprises. 

Capital is a core component of the regulatory framework because capital absorbs unexpected 

losses and helps promote market discipline by aligning incentives and curtailing excessive risktaking. Moreover, significant private capital is the foundation for resilient national housing 

finance markets. As such, much of the Council’s analysis of the extent to which FHFA’s 

regulatory framework would adequately mitigate potential stability risks centered on FHFA’s 

recent capital proposal. 

In conducting its review, the Council considered the following two questions, among others: 

(1) Is the proposed capital rule appropriately sized and structured given the Enterprises’ risks 

and their key role in the housing finance system? 

(2) Does the proposed capital rule promote stability in the broader housing finance system?

Based on its assessment of the proposed rule, the Council’s key findings are as follows: 

Risk-Based Capital Requirements: The proposed rule includes a risk-sensitive capital 

framework that would result in a granular calibration of credit risk capital requirements. The 

alignment of market participants’ credit risk capital requirements across similar credit risk

exposures would mitigate risk to financial stability by minimizing market structure distortions. 

The Council evaluated whether the proposed rule generally would align credit risk capital 

charges with those of other market participants. 

The proposed rule would require aggregate credit risk capital on mortgage exposures that, as of 

September 2019, would lead to a substantially lower risk-based capital requirement than the bank 

capital framework. Given that the proposed rule’s risk weights are highly sensitive to certain 

risk characteristics of the exposures, average risk weights and the required credit risk capital 

would change through the credit cycle. The Enterprises’ credit risk requirements, however, 

likely would be lower than other credit providers across significant portions of the risk spectrum 

and during much of the credit cycle, which would create an advantage that could maintain 

significant concentration of risk with the Enterprises. 

The Council encourages FHFA and other regulatory agencies to coordinate and take other 

appropriate action to avoid market distortions that could increase risks to financial stability by 

generally taking consistent approaches to the capital requirements and other regulation of 

similar risks across market participants, consistent with the business models and missions of 

their regulated entities. 
Capital Buffers: The proposed rule includes a stress capital buffer and a stability capital buffer 

that would require the Enterprises to hold capital above their regulatory requirements. A stress 

capital buffer would mitigate risks to financial stability by requiring the Enterprises to hold 

sufficient capital to withstand a severely adverse stress and still remain viable going concerns. A 

stability capital buffer would mitigate risks to financial stability by reducing the expected impact 

of an Enterprise’s distress on financial markets or other financial market participants and by 

addressing the potential for decreased market discipline due to an Enterprise’s size and 

importance. The stress capital buffer would be set at 0.75% of an Enterprise’s adjusted total 

assets. The stability capital buffer, which would also be calibrated based on adjusted total assets, 

would vary according to an Enterprise’s share of total mortgage debt outstanding. The Council 

evaluated whether the proposed capital buffers were appropriately structured to address the risks 

posed to financial stability by the Enterprises’ activities. 

The inclusion of such capital buffers is an important step to mitigating the risks the Enterprises 

pose to the broader system. The calibration of the buffers in the proposed rule might help 

achieve certain policy goals, such as reducing the buffers’ impact on higher risk exposures, but it 

might be relatively risk-insensitive. Because the proposed buffers change based on adjusted total 

asset size and market share, an Enterprise’s capital buffers could decline on a risk-adjusted basis 

in response to deteriorating Enterprise asset quality or during periods of stress. Although a more 

risk-sensitive approach to calibrating the buffers could increase the pro-cyclicality of the 

aggregate risk-based capital requirements, it also might be better tailored to each Enterprise’s 

risks to financial stability and also allow them to better serve their function of providing an 

additional source of capital that can absorb losses during periods of severe stress.

The Council encourages FHFA to consider the relative merits of alternative approaches for 

more dynamically calibrating the capital buffers. The capital buffers should be tailored to

mitigate the potential risks to financial stability and otherwise ensure that the Enterprises have 

sufficient capital to absorb losses during periods of severe stress and remain viable going 

concerns, while balancing other policy objectives. 

Total Capital Sufficiency: The proposed rule would increase the quality and quantity of capital 

that the Enterprises would be required to hold. Significant high-quality capital would mitigate 

risks to financial stability by making it more likely that the Enterprises will be able to perform 

their countercyclical function and maintain market confidence as viable going concerns through 

the economic cycle. Similarly, a meaningful leverage ratio requirement that is a credible 

backstop to the risk-based requirements would address potential risks to financial stability by 

ensuring that the capital requirements are consistent with historical loss experiences during 

severe stresses while mitigating model, measurement, and related risks with a simple, transparent 

measure of risk. The Council assessed whether the Enterprises would be required to hold capital 

of sufficient quality and quantity to allow them to remain viable as going concerns after a severe 

economic downturn.

The proposed rule, by relying on definitions of regulatory capital that are similar to that of the 

U.S. banking framework, would ensure that high-quality capital is the predominant form of 

regulatory capital. The use of well-understood definitions of regulatory capital also fosters 
market discipline over each Enterprise’s risk-taking by facilitating the ability of shareholders, 

creditors, and other counterparties to understand the Enterprise’s capital position.

With respect to the quantity of regulatory capital, the Council considered the proposed capital 

requirements in light of a number of relevant benchmarks, such as: (1) losses during the 2008 

financial crisis; (2) a comparison of the proposed capital requirements to those of other large, 

complex financial institutions, taking into account differences in business models and risk 

profiles; and (3) the capital requirements implied by a conservative mortgage stress test model. 

The proposed rule requires a meaningful amount of capital for the Enterprises, and is a 

significant step towards ensuring that the Enterprises would be able to provide liquidity to the 

secondary mortgage market and satisfy their obligations during and after a period of severe 

stress. However, the Council’s analysis using benchmark comparisons suggests that risk-based 

capital requirements and leverage ratio requirements that are materially less than those 

contemplated by the proposed rule would likely not adequately mitigate the potential stability 

risk posed by the Enterprises. Moreover, it is possible that additional capital could be required 

for the Enterprises to remain viable concerns in the event of a severely adverse stress, 

particularly if the Enterprises’ asset quality were ever to deteriorate to levels comparable to the 

experience leading up to the 2008 financial crisis.

The Council encourages FHFA to ensure high-quality capital by implementing regulatory 

capital definitions that are similar to those in the U.S. banking framework. The Council also 

encourages FHFA to require the Enterprises to be sufficiently capitalized to remain viable as 

going concerns during and after a severe economic downturn. 

In addition to a capital framework, FHFA is also implementing significant additional 

enhancements to the Enterprises’ regulatory framework that would help mitigate the potential 

risk to financial stability, thereby enabling the Enterprises to provide secondary market liquidity 

throughout the economic cycle. These enhancements include efforts to strengthen Enterprise 

liquidity regulation, stress testing, supervision, and resolution planning. The Council supports 

FHFA’s commitment to developing its broader prudential regulatory framework for the 

Enterprises and encourages FHFA to continue those efforts. 

Should these reforms be implemented appropriately, they will lead to a more durable secondary 

mortgage market that helps provide sustainable access to mortgage credit across the economic 

cycle and is more resistant to shocks that could impair financial intermediation or financial 

market functioning to a degree that would be sufficient to inflict significant damage on the 

broader economy. The Council will continue to monitor the secondary mortgage market 

activities of the Enterprises and FHFA’s implementation of the regulatory framework to ensure 

potential risks to financial stability are adequately addressed; if the Council determines that such 

risks to financial stability are not adequately addressed by FHFA’s capital and other regulatory 

requirements or other risk mitigants, the Council may consider more formal recommendations or 

other actions, consistent with the December 2019 guidance.