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For Immediate Release
June 10, 2008
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OFHEO ANNOUNCES FINAL RULE FOR LOSS SEVERITY CALCULATIONS UNDER THE RISK-BASED CAPITAL REGULATION |
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WASHINGTON, DC — OFHEO Director James B. Lockhart announced that OFHEO has sent to the Federal Register a final rule for loss severity calculations under OFHEO’s Risk-Based Capital (RBC) Regulation. The final rule corrects certain deficiencies in the formulas used to calculate risk-based capital. The changes adopted in this rule began with a notice of proposed rulemaking (NPR) published in the Federal Register on December 5, 2007. The NPR was subject to a 90 day public comment period and comments received and reviewed by OFHEO are posted on OFHEO’s website. The rule becomes effective upon publication in the Federal Register.
The risk-based capital requirement is the amount of total capital – core capital plus a general allowance for loan losses less specific reserves – that an Enterprise must hold to absorb projected losses flowing from future adverse interest-rate and credit-risk conditions specified by statute, plus 30 percent mandated by statute to cover “management and operations risk.” The risk-based capital standard is based on stress test results calculated for the two statutorily prescribed interest rate scenarios and changes in house prices.
With this action, OFHEO implements two changes to the existing rule. The first change is being implemented because certain loss severity equations result in the Enterprises recording profits instead of losses on foreclosed mortgages during the calculation of the risk-based capital requirement. Unaltered, the loss severity equations overestimate Enterprise recoveries for defaulted government-guaranteed and low loan-to-value (LTV) mortgages. Those results are not consistent with the Risk-Based Capital regulation and result in significant reductions to the risk-based capital requirements of the Enterprises. The second change is being implemented because the prior treatment of FHA insurance associated with single-family mortgages with an LTV below 78 percent is inconsistent with current law. The changes announced today correct these deficiencies.
Link to final rule.
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OFHEO's mission is to promote housing and a
strong national housing finance system by
ensuring the safety and soundness of Fannie Mae and Freddie Mac.
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