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GSEs Would Need Up To $157 Billion Bailout in Economic Downturn

GSE, Fannie Mae, Freddie Mac News, Mortgage FinanceFannie Mae and Freddie Mac would likely need another sizable draw from the U.S. Department of Treasury should an economic downturn occur, according to data released by the Federal Housing Finance Agency (FHFA) on Thursday.

The Dodd-Frank Act Stress Tests (DFAST) – Severely Adverse Scenario report indicated that the two GSEs would need a second taxpayer bailout, this time of up to $157.3 billion, under hypothetical adverse economic conditions that included a rise in the nation's unemployment level up to 10 percent by the middle of 2016; a decline in real GDP as large as 4.5 percent by the end of 2015 before recovery begins in 2016; and long term interest rates drop significantly while short-term rates remain near zero.

Fannie Mae and Freddie Mac received a $187.5 billion taxpayer bailout in 2008, at which time they were taken into conservatorship by the FHFA. The fact that the Enterprises remain in conservatorship of the FHFA has been a contentious topic among lawmakers and housing industry stakeholders in recent months. Fannie Mae and Freddie Mac returned to profitability in 2012, but those profits declined substantially from 2013 to 2014. Recent reports, including one from the FHFA Inspector General, have warned that the profitability of the GSEs might not continue even though the conservatorship probably will.

Since 2012, all GSE profits have been swept into Treasury. The GSEs each have a capital buffer of $1.8 billion, but it is required to be reduced by $600 million per year until it reaches zero by 2018. Should the GSEs' losses exceed their capital buffer, they would require a draw from Treasury.

U.S. Senator Bob Corker (R-Tennessee), a member of the Senate Banking Committee, said the results of the DFAST offer further proof that GSE reform is necessary. Corker co-sponsored legislation along with Senator Mark Warner (D-Virginia) in 2013 to eliminate Fannie Mae and Freddie Mac and replace them with a private insurance company system with a government backstop. The bill, known as the Housing Finance Reform and Taxpayer Protection Act of 2014 (S.1217), passed in the Senate Banking Committee by a vote of 13 to 9 in May 2014.

"Today’s FHFA stress test is yet another stark reminder of the need for Congress to wind down Fannie Mae and Freddie Mac and reform our housing finance system," Corker said. "With control of both houses and with the amount of effort that has been put forth to develop a bipartisan, bicameral consensus, this Republican-led Congress has the opportunity to demonstrate it is serious about protecting American taxpayers, and I hope we will not let this opportunity pass us by."

According to the DFAST results released Thursday, the combined remaining funding commitment for Fannie Mae and Freddie Mac under the Preferred Stock Purchase Agreements was $258.1 billion.

Fannie Mae and Freddie Mac, and all financial institutions with more than $10 billion in assets, are required by a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to take an annual stress test to determine if they can absorb losses when adverse economic conditions strike. The findings of the FHFA's report are not expected outcomes, but rather modeled projects in "what if" scenarios based on assumptions about operations at Fannie Mae and Freddie Mac, loan performance, macroeconomic and financial market conditions, and house prices.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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