In Disaster, Freddie and Fannie Could Need $99 Billion

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If the economy fades sharply as it did in the Great Recession, Fannie Mae and Freddie Mac may need $99 billion in bail out money, according to a study by the Federal Housing Finance Agency

In a new report, FHFA analysts wrote about the Enterprises (Fannie and Freddie):

As of December 31, 2016 the Enterprises had drawn a combined $187.5 billion from the Department of the Treasury under the terms of the Senior Preferred Stock Purchase Agreements (PSPAs), and the combined remaining funding commitment under the PSPAs was $258.1 billion. In the Severely Adverse scenario, incremental Treasury draws are projected to range between $34.8 billion and $99.6 billion depending on the treatment of deferred tax assets. The remaining funding commitment under the PSPAs after the projected draws is $223.2 billion, without establishing valuation allowances on deferred tax assets. Assuming both Enterprises establish valuation allowances on deferred tax assets, the remaining funding commitment is $158.4 billion.

How bad is Severely Adverse scenario?

In the 2017 DFAST Severely Adverse scenario, U.S. real GDP begins to decline immediately and reaches a trough in the second quarter of 2018 after a decline of 6.50 percent from the pre-recession peak. The rate of unemployment increases from 4.7 percent at the beginning of the planning horizon to a peak of 10.0 percent in the third quarter of 2018. The annualized consumer price inflation rate initially declines to about 1.25 percent by the second quarter of 2017 and then rises to approximately 1.75 percent by the middle of 2018.

America’s unemployment rate reached 10.2% in October 2009.

The government has begun a number of stress tests since the end of the last financial crisis. Most have been done on big banks  While the banks are private enterprises, Fannie Mae and Freddie Mac are quasi-government agencies.