If the nation faced another major economic downturn, Fannie Mae and Freddie Mac could require an additional taxpayer bailout of around $190 billion, according to stress test results released April 29 by the Federal Housing Finance Agency, Bloomberg reported.
The Dodd-Frank Act mandates the stress tests, which use performance gauges similar to those used by the Federal Reserve in testing the ability of the country’s banks to stay afloat in the event of a major recession.
Since 2008, the two government-sponsored enterprises have taken $187.5 billion in taxpayer aid.
The test results reflect the terms of that bailout, which require the GSEs to send to the U.S. Department of the Treasury their entire quarterly profits above a minimum net worth threshold. That money, counted as a return on the U.S. investment, prevents them from rebuilding capital or paying down debt to taxpayers.
“These results of the severely adverse scenario are not surprising given the company’s limited capital,” Fannie Mae Senior Vice President Kelli Parsons told Bloomberg. “Under the terms of the senior preferred stock purchase agreement, Fannie Mae is not permitted to retain capital to withstand a sudden, unexpected economic shock of the magnitude required by the stress test.”
Under worst-case scenario circumstances, the two GSEs would need $84 billion to $190 billion by the end of 2015 if another financial crisis caused housing prices to tank.
The FHFA also analyzed the GSEs’ financial health using its own tests, which rely on different economic models from those of the Federal Reserve. Under the FHFA model, Fannie and Freddie would not require additional taxpayer aid and, in fact, would provide $36.3 billion to $54 billion in additional payments of their quarterly profits by the close of 2015, Bloomberg reported.
The GSEs’ combined payments to the government by the close of March stood at $202.9 billion.
Bloomberg reported that interest in winding down the GSEs has slowed, with the Senate Banking Committee postponing a vote on new legislation that would replace Fannie and Freddie over five years with a new federal insurance program for mortgage bonds that would activate only once private investors were wiped out.
In 2013, Fannie posted a record profit of $84 billion, while Freddie reported a profit of $48.7 billion.