Both Fannie Mae and Freddie Mac failed this year’s Dodd-Frank Act Stress Test (DFAST). This is according to the Federal Housing Finance Agency (FHFA).
This means that both Government Sponsored Enterprises (GSE) would need a bailout of almost $100 million in the event that a severe economic crisis arise.
Based on the numbers, the test shows that Fannie and Freddie would need an amount between $34.8 and $99.6 billion as bailout should these severe crises come about.
While the results showed that they failed, this year’s turnout is a better than before. Last year’s test results showed that these GSEs would need $125.8 billion. This is an improvement but clearly, more improvement is needed.
SEVERELY ADVERSE SCENARIOS
The 2017 DFAST creates a “severely adverse scenario” to measure these financial institutions’ ability to perform in the face of an economic crisis. The “scenario” is based on different hypothetical situations like a severe global recession with periods of “elevated stress” in corporate financial and commercial real estate markets.
These scenarios include a GDP decline as much as 6.50% and a peak of 10% in the unemployment rate. A 1.25% decline of consumer price inflation is included as well as a decline in equity prices at about 50%. Additionally, a home price fall by 25% and commercial estate prices by 35%.
BUSINESS AS USUAL FOR FANNIE AND FREDDIE
The FHFA has been requiring Fannie and Freddie and each Federal Home Loan Bank this stress test in pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).
These GSEs have been operating under federal conservatorship since the 2008 crisis. In 2010, both Fannie Mae and Freddie Mac are required to send the entirety of their profits to the U.S. Treasury which was amended by the Obama administration. This is to pull down remaining capital buffers until it reaches zero by 2018.
In connection, both institutions continue to give their profits in respect to the amendment. During the second quarter of this year, Fannie Mae paid $162.7 billion while Freddie Mac paid out $108.2 billion to the Treasury. And shortly before the results came out, the FHFA announces their housing goals for 2018-2020 for both GSEs.