In an extremely adverse economic scenario, Freddie Mac would require more government assistance than its secondary counterpart, a new report says.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires stress tests for federally regulated financial institutions with more than $10 billion in consolidated assets.
In the case of Freddie and Fannie Mae, the stress tests are required to be implemented this year.
The regulator of the two firms, the Federal Housing Finance Agency, released the results of stress tests conducted on the pair of companies.
The stress tests used a nine-quarter home-price decline of 25 percent based on the CoreLogic index. It also estimated a drop in non-agency securities of between 20 percent and 90 percent at the start of the forecast horizon. In addition, it assumed an instantaneous default of the largest counterparty for securities financing transactions and derivatives.
Using the key assumptions provided by FHFA, Fannie and Freddie used their own internal models to project financial results.
“In the severely adverse scenario, incremental Treasury draws range between $84.3 billion and $190.0 billion depending on the treatment of deferred tax assets,” the report said.
However, despite Fannie’s much larger size — its book of business was $3.2 trillion as of Feb. 28 versus $1.9 trillion at Freddie — it fared better than Freddie.
FHFA said Fannie would require between $34.4 billion and $97.2 billion in additional Treasury draws under the adverse conditions.
But at Freddie, needed Treasury draws would be between $49.9 billion and $92.8 billion.
“While this effort achieves a degree of comparability between the enterprises, it does not eliminate differences in their respective internal models, accounting differences or management actions,” the report stated.
