Fannie Mae's complaints about a recently proposed risk- based capital rule are misguided, the company's regulator said Wednesday.

The proposal, sent to Congress March 26, included a stress test that suggested Fannie Mae was undercapitalized by nearly $3.7 billion as of June 30, 1997, a sample date. Competitor Freddie Mac, however, was in the black.

A Fannie Mae spokesman promptly said the test result "lacks credibility" because Standard & Poor's gave the government-sponsored enterprise an AA- minus "risk-to-government" rating in early 1997.

But Mark A. Kinsey, acting director of the Office of Federal Housing Enterprise Oversight, defended the proposal, calling its stress test largely "on target."

"At least one of our required institutions will be arguing that the stress test conditions are too stressful and that they already have more than enough capital," Mr. Kinsey said in a speech before Women in Housing and Finance. "However, as anyone familiar with how (Standard & Poor's and other) ratings are determined knows, they are based on a variety of objective and subjective factors, only one of which is capital."

Mr. Kinsey said OFHEO's existence and other factors "enabled S&P to look past the capital weaknesses in their rating determination."

Fannie's capital shortfall resulted not from credit risk associated with its affordable housing loans, but from interest rate risk associated with how it funds those mortgages, he said.

"Freddie Mac has simply done a better job of hedging its interest rate risk," he said.

Still, Mr. Kinsey discouraged observers from fixating on Fannie Mae's alleged capital shortfall. The results from one day in 1997 do not necessarily reflect the company's present or future circumstances, he said. Moreover, even if Fannie Mae were $3.7 billion in the hole, it would not necessarily have to raise that much capital.

For example, Mr. Kinsey said, Fannie could have made up the shortfall for a mere $200 million by adjusting its debt structure.

But Mr. Kinsey was effusive in his praise for the proposed rule, which his agency has labored over since 1992. He said the stress test gives investors a better idea of the risk incurred by the firms and would "discourage regulatory capital arbitrage" because capital would be tied closely to risk.

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