The Strategic Implications of New GSE Liquidity Regulations

Yesterday, our report brought to light a new FHFA liquidity standard with the potential to be at least as important to U.S. housing finance as the agency’s high-profile capital proposal.  As we showed and the American Banker today reported, the liquidity rule interacts with the capital proposal in complex and, we conclude, unintended ways.  It makes sense for the capital rules to aim for bank-like loss absorbers – mortgage risk is the same risk whether it’s on a bank’s balance sheet, an MI’s, or Fannie and Freddie’s.  But, funding inflows in and out of the GSEs work very different because GSEs are very different than banks, GSIBs included, when it comes to critical factors such as funding sources, outflow expectations, and federal safety net.  It’s possible that FHFA’s liquidity rule masters all these differences and thus ensures that Fannie and Freddie could meet mission-critical market needs under stress.  However, since FHFA chose to impose these strategy-critical standards at dark of night, we can’t tell.  What we do know is very worrisome.