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US Mortgage-Finance Giants May Need $100b in New Crisis

The housing crisis is spreading rapidly to the US middle class. The housing crisis is spreading rapidly to the US middle class.

Mortgage-finance giants Fannie Mae and Freddie Mac could need nearly $100 billion in bailout money in the event of a new economic crisis, according to stress test results released Monday by their regulator.

The companies would need to draw between $34.8 billion and $99.6 billion in US Treasury aid under a “severely adverse” scenario, depending on how they treated assets used to offset taxes, the Federal Housing Finance Agency said in its report. The losses would leave $158.4 billion to $223.2 billion available to the companies under their bailout agreements, Bloomberg reported.

Fannie and Freddie, like other major financial companies, are required by the Dodd-Frank Act to face annual tests of their ability to withstand a major recession. The results are likely to be used both by proponents of letting the two companies build a larger capital buffer and by some policy makers who think such an effort isn’t needed.

The current terms of their bailout agreements require Fannie and Freddie to turn over nearly all profits to treasury in the form of dividend payments. They are currently permitted to retain a capital buffer of $600 million apiece, and the level will fall to zero next year.

FHFA Director Mel Watt has warned against letting the buffer disappear and said he may allow the companies to build some capital. The retained earnings, which would cut the taxpayer dividend, would only be enough to protect against small losses rather than the dramatic impact of a severe crisis, Watt and other FHFA officials have said.

While Fannie and Freddie don’t have a significant capital buffer, they have taken other steps over the past eight years to reduce their risk of losses in another crisis. The companies’ books of business are experiencing their lowest default rates in years, and both have accelerated sales of new securities designed to protect them from some losses if defaults increase. The housing crisis is spreading rapidly to the middle class.

The stress tests, whose parameters are designed by the Federal Reserve and FHFA, this year included a 6.5% decline in gross-domestic product, a rise in the unemployment rate to 10% and a 25% fall in home prices, among other factors. FHFA also required Fannie and Freddie to calculate the impact if their largest counterparties defaulted.

Fannie and Freddie don’t make mortgages, but buy them from lenders, wrap them into securities and make guarantees to investors in case the loans default. Together they back more than $4 trillion in securities.

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