WASHINGTON — As soon as the Federal Housing Finance Agency re-proposed a capital framework for Fannie Mae and Freddie Mac, some observers warned that potential investors could be scared off by the high amount of loss protection the companies would have to hold.
But others are suggesting that may be an overreaction.
The proposed target of over $230 billion in combined risk-based capital for the two government-sponsored enterprises is more than 70% higher than the amount proposed in a previous plan under former FHFA Director Mel Watt.
But the reality of the new proposal is much more nuanced. Under the new framework, Fannie and Freddie would be required to hold $135.1 billion in core regulatory capital, plus an additional $98.8 billion in three supplemental capital buffers.
Some experts theorize that the FHFA may deploy options that would allow Fannie and Freddie to technically leave conservatorship before reaching the new capital target. And while the proposal would require the GSEs to hold the additional buffers before paying dividends, the agency could show flexibility on their making capital distributions.
“Whether or not [the GSEs] have to have that capital day one of being out of conservatorship or year three is a question they ultimately need to answer and haven’t yet,” said Karen Petrou, a managing partner at Federal Financial Analytics.
Determining the right amount of capital for Fannie Mae and Freddie Mac has always been about striking a balance between a figure low enough to attract investors and maintain access to credit, and high enough to avoid another government bailout.
FHFA Director Mark Calabria has said previously the agency’s capital rule would give investors a clear idea of what will be required once the two companies return to the private market. For a successful offering the agency needs shareholders to invest potentially record-high amounts of money.
“Nobody will invest in anything unless they understand how much capital a company is required to hold because that determines ultimately the return on equity the investor wants to price,” Petrou said.
But some wondered after the FHFA debuted its new proposal on Wednesday whether the high figure would actually ward off investors. Currently, the GSEs have about $24 billion in capital, and Calabria has said it would likely take the companies more than a decade to work up to the capital level needed to exit conservatorship based on retained earnings alone.
“We have earlier argued that higher capital requirements relative to what was required under the 2018 proposed capital rule would make it more challenging for the GSEs to raise external capital,” Bose George, a managing director at Keefe, Bruyette & Woods, said in a research note. The higher capital requirements would reduce an investor’s…