A summary of a proposed risk-based capital regulation for Fannie Mae and Freddie Mac, released on Friday, revealed that Fannie would not have met the requirement had it been in effect on test dates in 1996 and 1997.

The Office of Federal Housing Enterprise Oversight's summary, which was issued to Congress after the Office of Management and Budget cleared the regulation, said Fannie "would have been short" by $3.5 billion on the 1996 test date and nearly $3.7 billion on the 1997 date, "primarily because (Fannie's) asset-liability structure was less well hedged against interest rate risk than Freddie Mac's."

Freddie Mac would have exceeded its capital requirements by $1.57 billion for the 1996 date and $1.28 billion for the 1997 date.

Mark A. Kinsey, acting director of OFHEO, emphasized that the example was included to illustrate how the requirement would work and did not necessarily reflect what Fannie or Freddie's results would be today. But a Fannie Mae spokesman said the illustration called the entire proposed rule into question.

"OFHEO's risk-based capital proposal, which asserts that Fannie Mae was undercapitalized precisely at the moment when Standard and Poor's was giving us a AA-minus rating, lacks credibility," the Fannie spokesman said. In fact, he said, "the company will be able to comply with any reasonable risk-based capital standard without harm to its housing mission or its shareholders."

The interest rate risk stems from the mortgages that Fannie and Freddie buy for their own investment portfolios.

The summary notes that "a projected capital shortfall, even a large one, does not imply than an Enterprise actually has to raise that amount of capital."

The point of the stress test is to measure risk, Mr. Kinsey explained. "A higher capital requirement means higher risk, a lower capital requirement means lower risk," he said.

A 1992 act gave OFHEO the job of creating a stress test that requires the enterprises to hold enough capital to remain solvent during a 10-year period of credit and interest rate stresses.

It also requires the enterprises to hold additional capital to protect against management and operations risk. The capital requirement for Fannie and Freddie wouldl fluctuate quarterly depending on a computer calculation of how well the mortgage companies manage their risks.

The proposal was delivered to the House and Senate banking committees for a 15-day review period. After that it will be released for a four-month public comment period.

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