Stress tests show GSEs would have enough capital to cover crisis losses

WASHINGTON — The mortgage giants Fannie Mae and Freddie Mac would face up to $20 billion in combined credit losses in the event of a severe financial downturn, according to stress test results released Friday by the Federal Housing Finance Agency.

Although the credit losses would exceed those forecast under previous stress test scenarios, Fannie and Freddie likely maintain a large enough capital cushion to cover the projected losses.

The government-sponsored enterprises, as part of an annual exercise required for institutions with more than $250 billion of assets, were tested against a hypothetical financial crisis scenario that featured a severe global recession with stressed commercial real estate and corporate debt markets as well as a global market shock.

Under the scenario, the largest loss the GSEs would suffer would be the combined $20 billion in credit losses, which would account for 0.32% of their portfolio, followed by losses from the impact of the global market shock. However, Fannie and Freddie would still both report income under the hypothetical downturn, driven largely by strong home price appreciation.

Fannie Mae and Freddie Mac would face up to $20 billion in combined credit losses in the event of a severe financial downturn, would have enough capital to absorb the losses.
Fannie Mae and Freddie Mac would face up to $20 billion in combined credit losses in the event of a severe financial downturn, would have enough capital to absorb the losses.
Bloomberg News

Comparatively, in the 2019 stress test scenario, the GSEs would have lost a combined $12.8 billion.

This year’s stress test for Fannie and Freddie is the first to take into account a January agreement between the FHFA and the Treasury Department that allowed the GSEs to hold significantly more capital than the previous benchmark.

Those amendments to the preferred stock purchase agreements, which dictate the government’s ownership of the GSEs, permitted Fannie and Freddie to retain all of their earnings until they meet the requirements laid out in the FHFA’s new capital framework. Those requirements mandate that the GSEs ultimately hold roughly $275 billion after they exit conservatorship.

Because of that agreement and their current capital holdings, Fannie and Freddie would not need to draw any money from Treasury under this year’s stress-test scenario.

Also on Friday, the FHFA released the results from last year’s stress tests, which were not published because the Federal Reserve had added alternative stress-test scenarios in reaction to the COVID-19 pandemic. The FHFA had delayed publishing the 2020 stress test results so that Fannie and Freddie could incorporate those alternative scenarios.

The results of the 2020 tests showed that the GSEs would suffer a combined $13.6 billion in credit losses, which would be the largest contributor to overall losses under that scenario.

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