This is an updated version of a story running in the July 17, 2001 paper edition of American Banker

WASHINGTON — The Bush administration on Monday signed off on a rule subjecting Fannie Mae and Freddie Mac to complex new capital requirements as of July 19, 2002.

By its action, the administration indicated it plans to take a tough, if low profile, line with the government-sponsored enterprises. The Office of Management and Budget, which had the final say on the rule, declined to comment Monday, referring questions to the Office of Federal Housing Enterprise Oversight.

Officials at that agency, which is charged with ensuring that Fannie and Freddie operate safely, merely released a statement late Monday saying the rule would be published in the Federal Register on July 19. The agency did not detail the rule or explain how, if at all, it had changed from the version proposed in April 1999.

Under a 1992 law requiring the capital rule, it will not take effect for one year.

In allowing OFHEO to proceed, administration officials rebuffed requests by Fannie and Freddie to delay the capital rule. The GSEs’ lobbyists had met with administration officials last week to argue that the rule should not be finalized because it has not been tested and may not work.

In a statement, OFHEO Director Armando Falcon Jr. assured the GSEs that he is “confident the enterprises will be able to comply with this standard without any adverse impact on their operations.”

Freddie praised the rule in a statement Monday night, saying it is important to maintaining the confidence of investors, policymakers, and the public. “OFHEO’s promulgation of the risk-based capital rule will create capital regulations that are at the vanguard of financial institution regulation worldwide,” Freddie said.

“We have not seen the risk-based capital rule cleared by the Office of Management and Budget today but will begin analyzing it as soon as it is available,” the company’s statement added. “During the upcoming one-year period before the rule becomes operative for Freddie Mac, we will work with OFHEO to ensure that the rule is workable and will be implemented successfully.”

Freddie said it is confident it will be able to meet the new standard, adding “We expect the risk-based capital rule to be flexible enough for Freddie Mac to use many strategies to meet the rule’s capital requirements.”

Fannie’s reaction was slightly less upbeat, but also noted, “We believe that when the rule is implemented, we will meet the risk-based capital standard, and that it will be the most rigorous standard ever put in place for a financial institution.”

FM Watch, a group of lenders and mortgage insurers, insisted that getting the long-sought capital rule in place does not address “the many other issues surrounding the GSEs, including mission creep, the need to do more on affordable housing, and the fact that the GSEs retain over one-third of the taxpayer subsidy for private stockholders.

“Only a single, effective GSE regulator can take on this challenge,” FM Watch executive director Mike House said.

Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting firm here, said the rule’s release shows the Bush administration is not afraid to stand up to the GSEs, which are renowned for their political clout. “I think it means that OMB decided they were not going to bow to what we believe has been significant pressure,” she said.

“People have been saying there isn’t an administration GSE policy, and I think this shows that there is,” she added. She said she thinks the administration “is going to be for a more stringent safety-and-soundness regime, as at least a first step.”

The capital rule has been in the works since 1992 when Congress required it and created OFHEO. The rule was proposed in February 1995, again in June 1996, and a third time in April 1999. OFHEO paid Deloitte and Touche roughly $2 million to test the rule, according to agency spokeswoman Stefanie Mullin. That is because the rule includes a complex formula for calculating capital needs assuming an economic downturn that endured for 10 years — as required by the 1992 law. The most recent version was polished off in December 2000 and delivered to OMB for its standard review. The review stretched to seven months, ending in Monday’s decision to move forward.

Fannie and Freddie may still appeal to lawmakers to intervene because the rule now goes to Congress for a short review period. Industry and congressional sources said Fannie lobbyists were pressing lawmakers on Friday to delay it. Rep. Richard H. Baker, R-La., sent letters Friday asking Fannie and Freddie to detail their efforts to thwart the capital rule. At a hearing last Tuesday, GSE executives had agreed to submit copies of letters they sent to the OMB requesting a 90-day delay, but when they did not do so, Rep. Baker put his request in writing and broadened his inquiry to include other information.

Both companies are considered financially strong and well managed. Just last week, OFHEO said that as of March 31 both companies were adequately capitalized under existing requirements. Fannie’s $21.482 billion of capital exceeded its minimum requirement by $448 million, and Freddie’s $15.164 billion exceeded its minimum requirement by $606 million, the agency said.

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