Fannie, Freddie Could Need as Much as $126 Billion in Crisisby
Regulator’s stress test subjects companies to severe downturn
Companies would still have $132 billion in funding remaining
Fannie Mae and Freddie Mac could need as much as $125.8 billion in bailout money from taxpayers in a severe economic downturn, according to stress test results released Monday by their regulator.
The Federal Housing Finance Agency said that the government-controlled companies, which back nearly half of new mortgages, would need at least $49.2 billion.
The annual test, required by the Dodd-Frank Act, is likely to be used both by proponents of allowing Fannie Mae and Freddie Mac to build capital and by those who think there’s not an urgent need for the government to take that move.
Under the terms of the companies’ bailout agreements, Fannie Mae and Freddie Mac must send nearly all of their profits to the U.S. Treasury and wind down their capital buffers until they reach zero dollars in 2018. After that point, any loss at either company would require a draw from taxpayers.
Monday’s stress test results showed that the funds that the U.S. Treasury Department is authorized to use in a bailout are more than enough to cover the billions that Fannie Mae and Freddie Mac would likely lose in a crisis. The companies would have between $132.2 billion and $208.9 billion in available bailout money from the Treasury after the period of financial duress passed, according to FHFA.
The stress tests assumed an extreme adverse scenario, designed by the Federal Reserve, in which real U.S. gross domestic product dove 6.25 percent by the first quarter of next year, unemployment doubled to 10 percent by the third quarter of 2017 and inflation rose to 1.9 percent.
“A stress test for an entity that is not allowed to retain capital is an exercise in stupidity,” Tim Pagliara, chief executive officer of CapWealth Advisors, said in an e-mail. “The only way you can fix it is to retain capital.”
Pagliara is also head of Investors Unite, a Fannie Mae and Freddie Mac shareholder group.
Fannie Mae and Freddie Mac buy mortgages from lenders, wrap them into securities and make guarantees to investors in case borrowers default. The companies have been in a conservatorship helmed by the FHFA since 2008 and received $187.5 billion in bailout money from the U.S. Treasury.
Last week, Fannie Mae reported a profit of $2.9 billion for the second quarter, while Freddie Mac reported a profit of $993 million. Freddie Mac has reported a loss in two of the past four quarters.
FHFA Director Melvin Watt in a February speech warned that the companies’ falling capital buffers could one day cause investors to doubt their guarantees of mortgage-backed securities. Such uncertainty would cause mortgage rates to go up.
“The most serious risk and the one that has the most potential for escalating in the future is the enterprises’ lack of capital,” Watt said.