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Home General News Mortgage Industry Articles Fannie, Freddie, FHLBs Face New Requirements, Lockhart Says
Fannie, Freddie, FHLBs Face New Requirements, Lockhart Says PDF Print E-mail
Written by By Dawn Kopecki and Jody Shenn   

Jan. 23 (Bloomberg) -- The Federal Housing Finance Agency plans to propose new financial requirements next week for Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.

The regulatory agency may place new restrictions on Fannie and Freddie’s investments and will revamp capital requirements for the home loan banks, director James Lockhart said in an interview.

Under draft regulations “that everyone fought long and hard for,” the agency will determine the “size and composition” of Fannie and Freddie’s $1.7 trillion combined mortgage portfolios, Lockhart said yesterday. He said his agency also plans to release new minimum capital rules for the 12 regional FHLBanks by Jan. 27, as called for by Congress when it enacted legislation in July to strengthen oversight.

“The 14 of them are so critical to this mortgage market,” Lockhart said of the government-sponsored enterprises his agency regulates.

Washington-based Fannie and McLean, Virginia-based Freddie, the two largest sources of mortgage money in the U.S., were placed under federal control in September after regulators said the two were at risk of failing. The Treasury Department, which pledged as much as $100 billion for each company to keep them solvent, pumped $13.8 billion into Freddie in November.

“They will be reporting numbers in mid- to late-February and, yes, I think everybody would expect that there would be a draw on Treasury,” Lockhart said of the prospect that one or both of the companies will need federal aid after they announce fourth-quarter earnings.

Congress shifted oversight of the 12 regional FHLBanks to Lockhart’s agency in July.

$1.25 Trillion of Debt

The FHLBank system is the largest U.S. borrower after the federal government, with $1.25 trillion of debt. The banks provide low-cost loans to more than 8,000 member banks and finance companies, including Bank of AmericaCitigroup and JPMorgan Chase.

As many as eight of the regional banks may fall short of minimum capital requirements as auditors require writedowns from their $76 billion of private mortgage-bond holdings to market prices, Moody’s Investors Service said this month.

The banks and Moody’s say many of the losses will be temporary because most of the debt will be paid off closer to face value than current market values suggest. Unrealized losses from mortgage investments totaled $13.5 billion on Sept. 30.

Lockhart declined to say whether the Federal Housing Finance Agency planned to ease or increase the banks’ capital requirements, which are reserves to cushion against losses, and analysts disagreed about the regulator’s likely direction.

“They will bend over backward to not cripple the Federal Home Loan Banks or the member institutions,” said Bert Ely, a banking consultant in Alexandria, Virginia, predicting an easing of the requirements. “They are a major source of funding for the banks and thrifts” that are making home loans.

Increasing Requirement

Rajiv Setia, a fixed-income strategist at Barclays Capital in New York, said he wouldn’t be surprised if FHFA increased the capital requirement.

“From a regulator’s perspective, what’s my upside in lowering the requirement and then, say you’re wrong,” Setia said. “If I’m a regulator, I want to be more punitive because I’m protecting my domain.”

The banks are required to hold a minimum capital cushion equal to 4 percent of their assets to reserve against losses. Lockhart said the proposed changes to that rule will lay out when a bank can be classified as “adequately capitalized, significantly undercapitalized or critically undercapitalized.” The classifications are used to determine certain enforcement actions.

Lockhart said he also plans to revamp the system’s so- called risk-based capital test, which takes into account fluctuations in the “fair value” of a bank’s assets.

“It needs work and we will be working on it,” he said.

Lobbying on Rules

The FHLBanks are lobbying FHFA, the Securities and Exchange Commission and accounting-standard setters to ease bookkeeping rules that require them to use market values for mortgage bonds, which saw a dramatic drop in value over the last two quarters amid the worst housing decline since the Great Depression.

“Conceptually I’m a big believer in fair value, but it’s tough in a market like this where there’s that fear factor, lack of confidence and lack of liquidity,” Lockhart said. Applying fair-value accounting to privately backed mortgage bonds “is somewhat problematic at the moment. It’s really hard to get a good market-based fair value because so few of these securities are trading.”

The Seattle FHLBank said Jan. 13 it is likely to fall short of its capital requirements for the fourth quarter, and the Pittsburgh bank said Jan. 16 it is “narrowly in compliance” with its standards. Seattle, Pittsburgh and San Francisco FHLBanks have suspended or delayed dividend payments since last month to protect their reserves.

-- Editors: Larry Liebert, Joe Winski