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In response to the Federal Housing Finance Agency's (FHFA) re-proposed rule to establish capital requirements for the government-sponsored enterprises (GSEs), NAFCU's Elizabeth LaBerge urged the agency to "adopt a realistic capital framework for the GSEs to begin moving toward exiting conservatorship." She warned that excessively high capital requirements could negatively impact credit unions and increase the cost of mortgage credit across the system, limiting access for vulnerable borrowers.

LaBerge, NAFCU's senior regulatory counsel, noted that the re-proposed rule drastically increases the GSEs' capital requirements, exceeding the worst-case loss scenarios developed by the Federal Reserve. Combined with recent guidance to update the GSEs' liquidity requirements, LaBerge said it "leaves little room for the GSEs to generate income and present an attractive return on investment to private investors."

"The FHFA must strike the proper balance to ensure the GSEs are stable, but still able to raise private capital and able to safely exit conservatorship without risking the money of American taxpayers," she added.

LaBerge also flagged the potential harms credit unions could face if capital levels are set too high.

"As member-owned, not-for-profit cooperatives, credit unions have a long history of offering products and services to low-income, moderate-income, and underserved consumers that have been turned away by banks," LaBerge wrote. "Increases in the cost to credit in the form of increased guarantee fees (g-fees) and mortgage rates would have a significant negative impact on credit unions’ ability to serve these less-wealthy members."

In addition, LaBerge warned of the proposed rule disincentivizing risk transfer through credit risk transfer (CRT) transactions in favor of private mortgage insurance (PMI).

"The need for stability created by CRT and consistency in how the FHFA treats CRT is especially significant in the midst of the COVID-19 pandemic and the potential housing crisis that may result," LaBerge argued. "It is likely that the next several quarters will bring increases in defaults and bankruptcies, potentially testing the GSEs’ capitalization and forcing draws on their Treasury lines of credit.

"…Now is when American consumers must be protected, and this sudden change only injects uncertainty into the secondary market," she added. "Abruptly moving away from CRT could push more loan volume to other government-backed programs, such as those offered through the Federal Housing Administration, overburdening that agency, concentrating mortgage risk in a few large lenders and continuing to place American tax dollars at risk."

Read the full letter here.

While NAFCU is supportive of efforts to protect taxpayers and ensure long-term success for the GSEs, the association has called on Congress to codify certain safeguards before removing the GSEs from conservatorship.

The FHFA is set to hold two listening sessions Sept. 10 and Sept. 14 to gather additional feedback on the capital proposal. This issue and other housing finance reform issues will also be addressed at NAFCU's upcoming Virtual Congressional Caucus; FHFA Director Dr. Mark Calabria is set to speak Sept. 14.