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Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules
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rigorous, and constantly evolving, helping minimize losses through the entire life cycle of a mortgage loan.
FHFA continues to believe that CRT
can play an important role in ensuring that each Enterprise operates in a safe and sound manner and is positioned to fulfill its statutory mission across the economic cycle. FHFA also continues to believe that an Enterprise does retain some credit risk on its CRT and that the risk should be appropriately capitalized.
FHFA believes that a 5 percent CRT risk weight floor will enhance the safety and soundness of the Enterprises by increasing the incentives to undertake risk transfer activities while continuing to capitalize retained CRT tranches against structure, model, unforeseen, and other risks. Furthermore, lowering the tranche level risk weight floor should reduce the extent to which the CRT effectiveness adjustments may require more regulatory capital for retained CRT exposures than is necessary to ensure safety and soundness, and help ensure that FHFA
does not unduly discourage CRT on mortgage exposures with risk profiles similar to those of recent acquisitions by the Enterprises.
Question 5: Is the 5 percent prudential floor on the risk weight for a retained CRT exposure appropriately calibrated? What adjustment, if any, would you recommend?
Overall Effectiveness Adjustment The proposed rule would remove the requirement that an Enterprise must apply an overall effectiveness adjustment to its retained CRT
exposures in accordance with the ERCFs securitization framework in 12
CFR 1240.44f and i.
FHFA included an overall effectiveness adjustment in the CRT
securitization framework largely in response to comments received on FHFAs 2018 notice of proposed rulemaking on Enterprise capital.
Commenters argued that CRT has less loss-absorbing capacity than an equivalent amount of equity financing due to the upfront and ongoing costs of CRT, and that while CRT coverage is only on a specified pool, equity financing can cross-cover risks throughout the balance sheet.
However, commenters on the 2020
ERCF notice of proposed rulemaking argued that while these considerations are reasonable, in the context of the totality of the proposed CRT framework and a credible leverage ratio requirement as a backstop, the overall effectiveness adjustment is not needed and creates unnecessary disincentives for the Enterprises to engage in CRT. In
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addition, commenters stated that the CRT tranche risk weight floor covers the risk that a CRT will not perform as expected in transferring credit risk to third parties, which is similar to the risk that the overall effectiveness adjustment was designed to cover.
Unlike the counterparty and losstiming effectiveness adjustments in the CRT securitization framework, the overall effectiveness adjustment does not target specific risks. For this reason, and given the opinions of commenters on the overall effectiveness adjustment, FHFA has determined that it is an appropriate place to make a refinement within the CRT securitization framework to further promote the use of CRT without increasing safety and soundness risks at the Enterprises.
FHFA is proposing to remove the adjustment rather than to reduce it due to the lack of empirical evidence suggesting that a lower overall effectiveness adjustment is less duplicative than the adjustment in the ERCF final rule published on December 17, 2020.
Question 6: Is the removal of the overall effectiveness adjustment within the CRT securitization framework appropriate in light of the proposed rules 5 percent prudential floor on the risk weight for retained CRT exposures?
Adjustments to CRT Capital Relief The two proposed CRT modifications would increase the capital relief afforded an Enterprise for wellstructured CRT on many common mortgage exposures, increasing incentives for the Enterprises to engage in CRT. For existing CRT, the two changes would increase capital relief compared to the current ERCF; however, the changes may not impact future CRT
in exactly the same way. Each Enterprise has designed its existing CRT
structures with attachment and detachment points, collateralization, and other terms based on the current ERCF and previous guidance. Each Enterprise will likely be able to structure the tranches and other aspects of its future CRT somewhat differently, taking into account modifications in any finalized rule amendments.
Nonetheless, FHFA believes that the proposed rules modifications would reduce the extent to which the CRT
methodology may require more regulatory capital for retained CRT
exposures than is necessary to ensure safety and soundness. FHFA also believes that these modifications would provide each Enterprise a mechanism for flexible and substantial capital relief through CRT, and CRT likely will remain a valuable tool for managing
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credit risk and that each Enterprise will base its CRT decisions on its own risk management assessments, not solely on the regulatory risk-based capital requirements.
The proposed rule would implement a modified ERCF CRT framework through which an Enterprise determines its credit risk-weighted assets for any eligible retained CRT exposures and any other credit risk that might be retained on its CRT. Under the proposed rule, an Enterprise would calculate credit riskweighted assets for retained credit risk in a CRT using risk weights and exposure amounts for each CRT tranche.
The exposure amounts of the retained CRT exposures for each tranche would be increased by adjustments to reflect counterparty credit risk and the length of CRT coverage i.e., remaining time until maturity. Unlike the current ERCF, the proposed framework would not include an overall effectiveness adjustment. Further, the proposed rule would also set a credit risk capital requirement floor for retained risk through a tranche-level risk weight floor of 5 percent rather than 10 percent.
The two proposed modifications to the CRT securitization framework could lead to a significant increase in capital relief. For Fannie Mae and Freddie Mac combined, capital relief from singlefamily CRT would increase by an estimated 45 percent, while capital relief from multifamily CRT would increase by an estimated 33 percent.
Together, aggregate capital relief on the Enterprises books of business would increase by an estimated 40 percent, where the increase is driven primarily by the change to the CRT tranche risk weight floor as evidenced by the example below. These modifications could help to ensure that the rule does not create undue disincentives to utilize CRTs.
Question 7: Is the proposed approach to determining the credit risk capital requirement for retained CRT exposures appropriately formulated? What adjustments, if any, would you recommend?
Question 8: Will the proposed amendments to the CRT securitization framework provide the Enterprises with sufficient incentives to engage in more CRT transactions without compromising safety and soundness?
CRT Example To provide clarity on how the proposed modifications would alter the CRT risk weight calculations, we provide an example using the same stylized CRT that was used as an example in the ERCF notice of proposed
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