Fannie Mae and Freddie Mac could be required to maintain nearly $200 billion in capital if they are ever released from the government’s hands, the regulator of the two bailed-out mortgage giants indicated Tuesday.
The Federal Housing Finance Agency, responsible for regulating the two businesses, issued a proposed capital rule that would require Fannie and Freddie to maintain a combined $181 billion in risk-based capital, a buffer that would allow them to sustain losses without becoming insolvent.
The capital requirements are theoretical, for now. They wouldn’t apply to the government-sponsored enterprises while they are in government hands, which they have been since 2008. Instead, the rule would be suspended while they remain in government conservatorship.
Mel Watt, the FHFA’s director, said that he was opening the proposal for public comment “to start a healthy discussion” about how much capital the businesses should maintain to shield taxpayers from losses.
The agency suggested that the $181 billion in risk-based capital would align with the capital requirements for banks and would have been sufficient to cover the losses Fannie and Freddie sustained in the 2007 mortgage crisis.
Even higher capital requirements, though, would be required if the two were identified by regulators as potential threats to the financial system — a likely prospect if they ever left the government hands because of their central role in the housing finance system. Fannie and Freddie buy mortgages from banks and other lenders, and package them into securities for sale to investors with a guarantee to back them in the case of losses. The two back more than $6.4 trillion in mortgage bonds and guarantee nearly half of all new home loans.
While Fannie and Freddie remain in the government’s custody, they are allowed to maintain only a small amount of capital. Since 2012, the two have been required to send all profits to the Treasury. Investors in the company have sought to have the government allow them to keep their earnings and build up capital.
The capital requirements Watt sketched out Tuesday underline the challenge that Fannie and Freddie would face in building up capital to regulatory minimums.
In recent quarters, they have sent along profits generally in the low single billions to the Treasury. Last quarter, however, they required assistance from the Treasury, thanks to the effects of the Trump-signed tax cuts.
Altogether, the two government-sponsored enterprises have sent $279 billion to the Treasury during their time in government hands. They have received bailout assistance of $191 billion.
