When FHFA proposed its new capital framework for Fannie and Freddie now and to come, it deferred adjusting the regime or even thinking about it in light of FASB’s current expected credit loss (CECL) standard. The decision earlier this week by the banking agencies to push banks into the CECL wringer creates yet another incentive for mortgage finance – especially higher-risk and/or longer-term loans – to depend on the secondary market, not portfolio capacity. An asymmetric CECL regime thus will preserve equality-essential mortgage finance, but only in a system that combines nonbank originators and taxpayer-backed guarantors in ways that could prove all too risky regardless of FASB and the banking agencies’ best intentions. And, as we noted earlier, GSE earnings will suffer as CECL-required reserves rise, adding another force propelling the Administration to take administrative action on GSE reform.
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