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FHFA Announces Results of Fannie Mae and Freddie Mac Dodd-Frank Stress Tests
Tuesday, August 9, 2016 6:35 AM

The Federal Housing Finance Agency’s annual stress test of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac showed they would need a bailout of up to $125.8 billion under the worst-case economic scenario.

The Dodd-Frank Act requires that stress tests be performed annually in order to determine if the GSEs have enough capital to absorb losses in the case of bad economic conditions. The hypothetical “severely adverse” scenario envisions a severe global recession accompanied by large reductions in asset prices, widening of corporate bond spreads, increased investor risk aversion and strained market liquidity conditions.

According to the test, the GSEs would need incremental Treasury Department draws of between $49.2 billion and $125.8 billion under the “severely adverse” scenario. The GSEs had drawn a combined $187.5 billion from the Treasury as of the end of 2015.

The report, Dodd-Frank Act Stress Tests – Severely Adverse Scenario, provides updated information on possible ranges of future financial results of Fannie Mae and Freddie Mac under severely adverse economic conditions. 

Because of their ongoing obligation to pay dividends to Treasury, the GSEs are expected to have no capital buffer remaining to protect against quarterly losses as of Jan. 1, 2018.