The Federal Housing Finance Agency (FHFA) with the
assistance of the two government sponsored enterprises (GSEs) for which it has
oversight, has updated projections for the additional funds Freddie Mac and
Fannie Mae will require from the U.S. Treasury.
Since the GSEs were placed in conservatorship under FHFA in August 2008
Freddie Mac has drawn $65 billion and Fannie Mae $104 billion from Treasury
under the terms of the Senior Preferred Stock Purchase Agreements (PSPAs) among
the three parties. Under terms of that
agreement the GSEs, while drawing funds from Treasury, also pay regular
dividends. To date Freddie Mac has paid $13
billion and Fannie Mae $15 billion while, at the same time, drawing on
The new projections are more optimistic than those made one
year ago which estimated cumulative Treasury draws (including dividends) at the
end of 2013 would range from $221 billion to $363 billion. The new projections are for cumulative draws
to range from $220 billion to $311 billion.
The change can be attributed primarily to the fact that actual results
for the first year of the earlier projection were substantially better than
The range of projections is arrived at through the use of
three different scenarios. These scenarios use identical assumptions except for
the basis used for house prices.
Experience has shown that changes in house prices have had the largest
impact on the GSEs financial results.
The three house price assumptions are:
Moody’s “stronger Near-term Rebound” house price paths.
Moody’s “Current Baseline” house price paths.
Moody’s “Deeper Second Recession” house price paths.
As can be seen from the chart, actual and forecasted house
price paths for Scenarios 1 and 2 used in the current projections are worse
than those used last year. The path in
Scenario 3 in October 2011 is better through the second quarter of 2012 than
the corresponding paths used one year ago and then worse thereafter.
The remaining assumptions, used in all three scenarios are:
Future interest rates are implied by the forward
curves as of June 30, 2011
ABS and CMBS prices fall by 5 points at the
beginning of the period;
- Agency MBS spreads to swaps remain unchanged
Zero growth in credit guarantees through year
Additions to retained portfolios are limited to
nonperforming loans bought out of pools backing Fannie Mae’s MBS and Freddie
are only small changes in the cumulative financial results for either GSE under
Scenarios 1 and 2, but substantial differences in the bottom line projections
under Scenario 3, the scenario using the “Deeper Recession” price path. The differences, however, are almost totally
attributable to increased provision for credit losses and other credit related
expenses. Freddie Mac’s credit-related
expenses increase $23 billion from Scenario 1 to Scenario 3 and Fannie Mae’s
increase $57 billion. Thus, $80 billion
of the projected $92 billion difference in Treasury draws across the scenarios
is directly related to credit-related expense projections.
are the projected draws including dividends for Freddie Mac and Fannie Mae
using each of the three scenarios:
All figures in $billions
However, when the dividends required
of the GSEs are broken out of the various scenarios, the financial situation
they face becomes much less severe; in fact, in Scenarios 1 and 2 dividend
payments to Treasury exceed additional Treasury draws. Under the PSPA, preferred stock accrues
dividends at 10 percent per year. FHFA
has periodically asked that the dividend requirement be dropped which would
substantially reduce the need for Treasury funds and could improve the public
perception of the GSEs.
When the current projections are
compared with those from October 2010, the following differences were noted.
- Both projections cover a period of
3.5 years thus the current one runs to the end of 2014; the earlier one to
December 31. 2013. This extension adds
$3 billion and $6 billion to current projections for Scenarios 1 and 3
- Actual results for the first year
were better than expected with a combined Treasury draw $19 billion lower for
Scenario 1 and $73 billion lower for Scenario 3 than the projections.
- However, updated projections for the
remainder of the initial projection were $14 billion higher for Scenario 1 and
$16 billion higher for Scenario 2.
differences in the projection pattern of financial results were driven by:
- A better than expected performance by
borrowers with high TMT LTV loans and modified loans.
- Foreclosure delays that pushed some
defaults into later years of the projection period.
- Trends indicating better than
expected REO sales prices.
- Net interest income that is higher in
the current projection because of lower interest rates resulting in decreased
funding costs and slightly higher average portfolio balances.
- The previously mentioned diversion of
the Scenario 3 house price path.
FHFA stresses that the projections reported in their current
document are not expected outcomes but modeled projections in response to “what
if” exercises based on assumptions about GSE operations, loan performance,
house prices, and other factors. They do
not define the full range of possible outcomes.