Fannie, Freddie pose risk to financial system, panel says in 'historic' finding

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Fannie, Freddie pose risk to financial system, panel says in 'historic' finding

Fannie and Freddie have been at the center of a heated debate between Republicans and Democrats since the government saved the two companies from collapse during the 2008 financial crisis. Republicans have been pushing for capital to be increased in preparation for privatization. However, some Democrats and affordable housing advocates warn that tighter capital requirements could drive up mortgage costs and limit Fannie and Freddie’s ability to serve low-income communities.

Instead of making home loans, Fannie and Freddie buy mortgages from lenders and bundle them into securities that are sold in the secondary market. This frees the lenders to make more loans.

Mark Calabria, director of the Federal Housing Finance Agency, Fannie and Freddie’s regulator, who proposed the stricter capital standard, welcomed the announcement during an open meeting on Friday of the council. Calabria, a Trump appointee, has long pushed for a closer look at the mortgage market.

“I commend the council for its historical recognition [Fannie and Freddie’s] Activities could endanger financial stability, ”said Calabria. “Today’s announcement is an important and necessary step in reforming and protecting the real estate financing system [companies] can continue to serve the market in times of crisis. “

The council, chaired by Treasury Secretary Steven Mnuchin, unanimously approved the results of the review, which will be released later on Friday after market close.

Under the rule proposed by Calabria, under normal economic conditions, companies would have to withhold capital equal to 4 percent of their assets, which means they would have to hold about $ 240 billion to get their combined assets of $ 6.1 trillion support – about five times what they hold today.

“The next crucial step will be to finalize the capital rule with the valuable recommendations of the council,” Calabria said today. The agency is working on completing the rule by the end of the year.

The review of the mortgage market is the first of its kind. The FSOC has the power to designate, for stricter supervision, both individual institutions and activities that it sees as potentially destabilizing for the financial system.

The body, created by the landmark Dodd-Frank Financial Regulation Act of 2010, focused on activity rather than specific companies in December after companies complained that supervision was too burdensome.

FSOC promised to continue to monitor the secondary mortgage market and make additional recommendations if the FHFA does not mitigate the risks.

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