Today, the Federal Housing Finance Agency (FHFA) released projections of the financial performance of Fannie Mae and Freddie Mac (collectively the GSEs), including potential draws under the Preferred Stock Purchase Agreements (PSPAs) with the U.S. Department of Treasury. The projections reflect the potential effect of a limited set of hypothetical changes in housing prices and are not predictions. To date, the GSEs have drawn $148 billion from the Treasury Department under the terms of the PSPAs. Under the three scenarios used in the projections, cumulative draws (including amounts already drawn) by the GSEs range from $221 billion to $336 billion through 2013.
The approach taken in developing the three projections was based roughly on the approach taken by the federal banking agencies last year in the Supervisory Capital Assessment Program. FHFA provided the GSEs with key assumptions for each scenario and the GSEs used their respective internal models to project their financial results based on the assumptions provided by FHFA. Because changes in house prices have had the largest impact on the GSEs’ financial results, the FHFA chose to change only that factor across the three scenarios by using Moody’s current baseline, a downside alternative to the baseline and an upside alternative to the baseline. FHFA chose to base the scenarios on Moody’s house price paths because the FHFA does not publish a historical price index. In addition, Moody’s is a widely used benchmark and it “provides a full set of quarterly, forward-looking house price paths for each of the 384 Metropolitan Statistical Areas and Divisions for which FHFA publishes a historical house price index.”
The projected combined cumulative draw for the GSEs is $221 billion under the upside alternative, $238 billion under the baseline alternative and $363 billion under the downside alternative. The cumulative projected draw for Fannie Mae under each scenario is approximately double the projected draw for Freddie Mac. Credit-related expenses are the primary driver of projected draws across all three scenarios. The projections also include dividend payments to the Treasury under the PSPAs. The release of this information is intended to give policymakers and the public an idea of the range of potential outcomes for taxpayer support of the GSEs.