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Stress Test Shows Fannie, Freddie Would Need Bailout in Downturn

APR 30, 2014 1:51pm ET
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Fannie Mae and Freddie Mac could require an additional bailout of as much as $190 billion in a severe economic downturn, according to the results of stress tests released by the regulator for the U.S.-owned companies.

The two mortgage-finance giants, which have already taken $187.5 billion in taxpayer aid since 2008, would need more funds to stay afloat if home prices plummeted in a severe downturn, the Federal Housing Finance Agency said in a report today. The stress tests, mandated by the Dodd-Frank Act, use the same assumptions that the Federal Reserve does in gauging the ability of the nation's largest banks to withstand a recession.

The results reflect the terms of the companies' bailout, which require them to send to the Treasury all of their quarterly profits above a minimum net worth threshold. That money, counted as a return on the U.S. investment, prevents them from rebuilding capital or paying down debt to taxpayers.

"These results of the severely adverse scenario are not surprising given the company's limited capital," Fannie Mae Senior Vice President Kelli Parsons said in a statement. "Under the terms of the senior preferred stock purchase agreement, Fannie Mae is not permitted to retain capital to withstand a sudden, unexpected economic shock of the magnitude required by the stress test."

The companies would need $84 billion to $190 billion by the end of 2015 in the worst circumstances, depending on accounting assumptions, the tests showed.

The FHFA also released the results of its own tests using different economic models. Under those, Fannie Mae and Freddie Mac won't need any more taxpayer aid, and will send the U.S. Treasury between $36.3 billion and $54 billion in additional payments of their quarterly profits by the end of 2015. Payments from the two companies to the government totaled $202.9 billion by the end of March.

The stress test results come as congressional momentum for winding down Fannie Mae and Freddie Mac appears to be stalling and shareholders push to keep the companies alive.

Senate Banking Committee leaders yesterday postponed a vote on a bill that would replace Fannie Mae and Freddie Mac over five years with federal insurance for mortgage bonds that would kick in only after private investors were wiped out. The measure, which is supported by President Barack Obama's administration, doesn't yet have enough support from Democrats to move forward.

Fannie Mae and Freddie Mac, which buy mortgages and package them into securities, began posting record profits as the housing market rebounded. Shareholders including Bruce Berkowitz's Fairholme Capital Management and hedge fund Perry Capital LLC are calling for the U.S. to allow investors a share in the funds the companies are returning to taxpayers.

Fannie Mae reported an $84 billion profit for 2013, the highest-ever for the 80-year-old company, while Freddie Mac reported a record profit of $48.7 billion.

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