WASHINGTON - The Office of Federal Housing Enterprise Oversight has taken its first public step toward creating a new risk-based capital standard for Fannie Mae and Freddie Mac.
In a notice published this week in the Federal Register, the regulator asked a series of technical questions on how to design a stress test for the two government-backed secondary market agencies.
By law, the regulator must determine how much capital the Federal National Mortgage Association and Federal Home Loan Mortgage Corp. would need to withstand 10 years of adverse credit and interest rate conditions.
Aida Alvarez, who heads the oversight office, said it faces "an unprecedented challenge" in designing the test.
"Because of the complex nature of the stress test," Ms. Alvarez said, "we are seeking input from the public before going forward with the proposed rules."
Congress set up oversight office in 1992 in the wake of the thrift industry debacle. The regulator is charged with monitoring the safety and soundness of the two mortgage agencies to make sure that taxpayers never need to bail them out.
Ms. Alvarez took over as the first director of the office 20 months ago. So far, it has issued standards for minimum capital that each of the agencies must maintain.
Officials of the oversight office would not say whether the risk-based standards would require significantly more capital than the minimum standards.
But Mark Kinsey, its deputy director, said the agencies had been increasing their capital levels for some time and the final risk-based level would present no surprise.
Under the 1992 law, Fannie Mae and Freddie Mac must be able to withstand a credit risk scenario based on the highest rate of default in an actual regional recession. The law specifies that the recession must have lasted at least two years and affected at least 5% of the U.S. population.
The stress test will apply these default and loss rates over 10 years on a national basis to Fannie Mae's and Freddie Mac's books of business.
The law also requires that the agencies be able to withstand a six- percentage-point increase or decrease in the yields of 10-year Treasury notes. The yield of 30-year mortgages closely follows those notes.
The oversight office will solicit comments for 90 days. It expects to issue a proposed rule by yearend. Risk-based capital standards are expected to be adopted at the two agencies in 1996.
