Fannie, Freddie Regulator Projects that Billions Could Be Needed in a New Recession

Tuesday, September 6, 2016

The loss of the capital buffer would require Fannie and Freddie to make additional draws from Treasury if they face losses from interest rate or earnings volatility, Watt said. The director warned such a development "could have real ramifications on the availability and cost of credit for borrowers."

But FHFA Director Melvin Watt cautioned in February that because of the PSPAs' terms the capital buffer is shrinking each and will disappear by 2018.

The GSEs are allowed to retain some income generated by their business operations to act as a capital buffer against potential losses. The buffer also reduces the need for Fannie and Freddie to make any additional draws from Treasury.

Four years ago, Treasury and FHFA changed the PSPAs to require Fannie and Freddie to direct all their net income to the Treasury. Because of this change, dividends paid by the GSEs — a total of about $241 billion sent to the Treasury since they stopped taking draws and again became profitable — have not counted towards paying back Fannie and Freddie's draws.

Neither enterprise has made a draw since 2012, although funding commitments of $258.1 billion remain available under the PSPAs.

Since 2008, when Fannie and Freddie were placed into FHFA-controlled conservatorship, they have taken a total of $187.5 billion in draws from the Treasury Department. Treasury used so-called “senior preferred stock purchase agreements,” or PSPAs, to bail out the GSE as they teetered on the brink of collapse during the mortgage meltdown.

The new report describes how well Fannie and Freddie would hold up under a set of hypothetical “severely adverse” economic conditions, which include a steep drop in real U.S. gross domestic product and big increases in unemployment and inflation. Under the severely adverse scenario, the government-sponsored enterprises (GSEs) would require between $49.2 billion and $125.8 billion in federal funding — known as Treasury draws — to continue operating.

The projections came Monday as the FHFA released the results of Fannie and Freddie’s stress tests, which are mandated by the Dodd-Frank Act.

The Federal Housing Finance Agency (FHFA) the regulator of Fannie Mae and Freddie Mac, projects that both agencies could need as much as $126 billion in taxpayer-funded bailouts to stay afloat in case another big recession hits.

NLBMDA 9/6/2016

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