April 30, 2014

Fannie, Freddie not profitable under Dodd-Frank stress test

May 1, 2014 – Fannie Mae and Freddie Mac would not remain profitable under conditions assumed in recent stress tests mandated by the Dodd-Frank Act, the Federal Housing Finance Agency said in releasing results Wednesday.

In its report, the agency also included the results of annual financial results projections for Fannie Mae and Freddie Mac that FHFA has published since 2010.

The results of FHFA's stress tests were much less pessimistic than the results found by the Dodd-Frank Act stress tests. The Dodd-Frank stress test combined a decline in value of non-agency securities with an assumed 25 percent decrease in home prices. The results show that neither Fannie Mae nor Freddie Mac would be profitable under these conditions through 2015.

FHFA's scenarios, however, assumed only a 2 percent decrease in home prices through 2015. Even the most extreme of the agency's three stress scenarios showed that Fannie and Freddie would be profitable under these conditions.

The Dodd-Frank Act requires certain financial companies with total consolidated assets of more than $10 billion to conduct annual stress tests to determine whether they have the capital necessary to absorb losses as a result of adverse economic conditions. Prior to this testing mandate, FHFA worked with Fannie and Freddie to develop forward-looking financial projections across three possible house-price paths (the "FHFA scenarios").

This year, Fannie and Freddie were required to conduct the FHFA scenarios as they have in the past, in conjunction with the initial implementation of the Dodd-Frank Act stress tests. Next year, the enterprises will only be required to conduct the Dodd-Frank Act stress tests.