Comment

Dear Sirs,

 Thank you for soliciting comments on this difficult and important topic.  To begin with, congratulations for creating such a thorough credit risk model.  I will only minimally touch upon this aspect of the proposal and will instead focus on five high-level comments on the framework for enterprise capital requirements. 


 1) Abandon the Seawall approach
 2) Incorporate the leverage ratio into the going-concern buffer 
 3) Don't be afraid of reducing transparency 
 4) Don't create backdoor policies 
 5) Don't suspend the rule; implement it immediately



1) Abandon the Seawall approach
Failing to plan is planning to fail, and it is possible to imagine scenarios at which even the most conservative capital levels could be insufficient.  The U. S. Government is fully attached to the enterprises, and this can be incorporated into the capital framework.  For example, if capital levels fall below a risk threshold, real dividends can be allocated to U. S. Treasury payments until capital levels are restored, and the amount of those dividend payments can be scaled according to the modeled risk exposure.  This approach, which could include some kind of contingent committed capital, could potentially avoid or delay actual capital infusions by the U. S. Government. 


2) Incorporate the leverage ratio into the going-concern buffer
75 basis points is an incredibly thin margin.  The entire framework could be simplified by increasing this buffer and eliminating the leverage ratio component. 


3) Don't be afraid of reducing transparency
The enterprises didn't fail because their risk models failed to consider known credit risk factors; they failed because there were factors that came to light too late to provide an opportunity to build a risk buffer.  The proposed credit risk model does a great  job of capturing known factors, but it was built to predict the past.  Adding a layer of abstraction would allow for the unknown components that will certainly be present in the next major stress event. 

By all means, continue to maintain and improve the proposed model, but use it as a measure of the core, known risk, and build a buffer around or on top of it.  Adding a level of abstraction would allow for the creation (and possibly, eventually the publication) of constructs of an estimated real HPI model (that could potentially inform conforming loan limits at some point in the future) that could address some of the known concerns related to rapid home value appreciation, or the creation of credit score compression adjustments. 


4) Don't create backdoor policies
Carefully review each component of the credit risk models and any abstraction layers to identify the effects they will have on the enterprises and on the mortgage markets.  One example of a backdoor policy in the current proposal is the different capital treatments that have been proposed for the different methods of mitigating the risk of Multifamily guarantees.  If a thorough study has been performed that clearly identifies one approach as being superior to the other, and this study stands up to rigorous scrutiny, enact a policy that encourages one over the other, and then assign capital requirements in a way that supports that policy.  By assigning capital requirements first, the regulator would be enacting policy without fully contemplating all of its impacts. 


5) Don't suspend the rule; implement it immediately
Because the U. S. government is fully attached, has provided capital payouts, and would likely do so again in the future, build a framework that acknowledges this reality and accurately reflects the true costs of this national policy.  By the way, I would also like to see provisions added that acknowledge caps on CEO pay and incorporate that effect into mandatory, unhedged capital investments by executive leaders and board members that take into account the relative magnitude and duration of the credit risk that these individuals have allowed the enterprises to add to their balance sheets.