Stress Test Shows Fannie-Freddie Would Need Bailout in DownturnClea Benson
Fannie Mae and Freddie Mac could require an additional bailout of as much as $157.3 billion in a deep recession, according to the results of stress tests released by the regulator for the U.S.-owned companies.
The two mortgage-finance giants, which have 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 Thursday. The 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 companies’ bailout terms, 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.
If the U.S. unemployment rate were to reach 10 percent in 2016 and the economy were to contract by 4.5 percent, the companies would need $68.6 billion to $157.3 billion, depending on how tax assets are treated in the accounting, the tests found. A similar test performed a year ago projected they would need as much as $190 billion in a severe downturn.
Fannie Mae and Freddie Mac, which buy mortgages and package them into securities, have become profitable 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.
The companies are authorized to draw as much as an additional $258.1 billion from the U.S. Treasury if they need it to stay afloat.