Fannie, Freddie can't withstand a serious downturn, warns FHFA

The GSEs are woefully undercapitalized for their size and importance, Calabria tells Congress

Fannie, Freddie can't withstand a serious downturn, warns FHFA

The Federal Housing Finance Agency on Monday warned Congress that Fannie Mae and Freddie Mac could not withstand a serious economic downturn and asked for the authority to develop more stringent capital standards for the GSEs.

Both the warning and the request came in the FHFA’s annual report to Congress, which it submitted Monday. The report covered the agency’s activities in 2019 and updated Congress on its current progress toward goals such as releasing the GSEs from conservatorship.

FHFA Director Mark Calabria warned Congress that Fannie and Freddie were “inarguably undercapitalized for their size, risk, and systemic importance.”

“As of December 31, 2019, the Enterprises owned or guaranteed approximately $5.7 trillion in single-family and multifamily mortgages, nearly half of all mortgage debt outstanding in the United States, and their combined leverage ratio was approximately 300 to 1,” Calabria wrote in the report. “By contrast, the largest financial institutions in the nation have an average leverage ratio of approximately 12 to 1. Given their risks and financial position, the Enterprises do not have the capital necessary to withstand a serious downturn in the housing market.”

Calabria said that the “lack of safety and soundness” at Fannie and Freddie jeopardized their mission to support sustainable homeownership.

“It also puts taxpayers at risk of absorbing their losses, as we saw after the housing and financial crisis of 2008, and it threatens every sector of the nation’s housing and mortgage finance systems,” Calabria said.

Calbria urged Congress to act on a proposed rule that would establish new capital requirements for Fannie and Freddie. According to the proposed rule, released by the FHFA last month, each GSE would have to become a “safe and sound” financial institutions on order to exit conservatorship, with strong enough capital to enable it to weather an economic downturn.

“By ensuring each Enterprise’s safety and soundness and ability to fulfill its statutory mission across the economic cycle, in particular during periods of financial stress, this rule will help build a strong, resilient housing finance system that supports sustainable homeownership and affordable rental housing,” Calabria said in the report. “However, only Congress has the authority to enact the legislative reforms necessary to address the structural flaws in the current model.”

Calabria called on Congress “remove unnecessary statutory exemptions and other advantages” that allow Fannie and Freddie to operate with lower capital requirements than private institutions.

“FHFA’s end-state vision is for the Enterprises to return to operating as fully-private companies outside of conservatorship and within a competitive, liquid, efficient, and resilient housing finance system, while a strengthened and independent FHFA ensures they have the capital reserves, risk management capabilities, corporate governance and regulatory oversight that are appropriate for their size, risk, and systemic importance,” Calabria said.