FEDERAL HOUSING FINANCE AGENCY
 

NEWS RELEASE
 

For Immediate Release 

October 27, 2011 

Contact: Corinne Russell (202) 414-6921 

Stefanie Johnson (202) 414-6376 

FHFA Updates Projections of Potential Draws for 

Fannie Mae and Freddie Mac
 

Washington, DC –The Federal Housing Finance Agency (FHFA) today released updated 

projections of the financial performance of Fannie Mae and Freddie Mac, including potential 

draws under the Senior Preferred Stock Purchase Agreements with the U.S. Department of the 

Treasury. FHFA first released financial projections in October 2010, and these updated 

projections show similar results for two out of three scenarios, and a decrease in cumulative 

Treasury draws in one scenario. Through the FHFA Conservator’s Report, FHFA tracks actual 

performance versus projections on a quarterly basis. 

(Attachment follows) 

### 

The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. 

These government-sponsored enterprises provide more than $5.7 trillion in funding for the U.S. mortgage markets 

and financial institutions. 
Federal Housing Finance Agency 

Projections of the Enterprises' Financial Performanc

October 2011 
Federal Housing Finance Agency Enterprises’ Fina

Contents 

Summary...................................................................................... 3 

Results ....................................................................................... 4 Comparison of Oct 2011 Projections to Oct 2010 Projections................. 8 Projection Scenarios ..................................................................... 11 House Price Assumptions .............................................................. 12 Appendix...................................................................................... 14 

2




Federal Housing Finance Agency 

Enterprises’ Fina

Summary 

This report provides updated information on possible future Treasury draws by Fannie Mae and Fredd“Enterprises”) under specified scenarios, using consistent assumptions for both Enterprises. FHFA pu

projections of the Enterprises’ financial performance in October 2010. The report on the initial projecti

found in FHFA’s Projections of the Enterprises’ Financial Performance, October 2010. The projections 

updated to reflect the current outlook for house prices, interest rates, and recent trends in borrower beprojection period has been extended an additional year.To date, the Enterprises have drawn $169 billion from Treasury under the terms of the Senior PreferrePurchase Agreements (PSPAs), as amended, between the Treasury and each of the Enterprises. FHthe Enterprises to develop forward-looking financial projections across three possible house price paththree scenarios used in the projections, cumulative Treasury draws (including dividends) at the 

range from $220 billion to $311 billion. In the initial projections released in October 2010, cumu

draws (including dividends) at the end of 2013 ranged from $221 billion to $363 billion.The difference in the range of ending cumulative Treasury draws between the October 2010 projectionOctober 2011 projections can be attributed primarily to the fact that actual results for the first year of thperiod in the October 2010 projections were substantially better than projected. (See page 8 for furthe

The projections reported here are not expected outcomes. They are modeled projections in response exercises based on assumptions about Enterprise operations, loan performance, macroeconomic and conditions, and house prices. The projections do not define the full range of possible outcomes. Actumay be very different. This effort should be interpreted as a sensitivity analysis of future draws to poss

paths.FHFA provided the Enterprises with key assumptions for each scenario. The Enterprises used their resmodels to project their financial results based on the assumptions provided by FHFA. While this effort degree of comparability between the Enterprises, it does not allow for actions that the Enterprises mighresponse to the economic conditions specified in the scenarios. Those Enterprise-specific business chlead to different results across the scenarios than are presented in these projections.

3
Federal Housing Finance Agency 

Enterprises’ Fina

Results 

The assumptions used in each of the three scenarios are described on page 11. The projected combiTreasury draws for both Enterprises through December 31, 2014 reach $220 billion under Scenario 1, under Scenario 2, and $311 billion under Scenario 3. Fannie Mae’s cumulative draws are higher than 

part because Fannie Mae’s mortgage book of business is approximately fifty percent larger than Freddaddition, Fannie Mae’s serious delinquency rates are higher than Freddie Mac’s. 

4

Figure 1: Cumulative Treasury Draws* ($ in billions) 

*Includes any projected net Fannie Mae Freddie Mac deficit at the end of 2014 

Cumulative draw including dividends Cumulative draw includ

$240 $140 $214 $219 

$40 $40 

2009 2010 2011 2012 2013 2014 2009 2010 2011 20

$90 

$125 

$142 $149 $150 

$123 

$136 $142 $145 

$75 

$142 

$193 

$80 

$120 $160 $200 

Scenario 3 

Scenario 1 

Scenario 2 

$64 

$76 

$75 

$51 

$83 

$60 $80 

$100 $120 

Scenario 2 

Sce
Federal Housing Finance Agency 

Enterprises’ Fina

Results (continued) 

The Enterprises are required to pay a 10 percent dividend on the amount of funds drawn by the EnterpPreferred Stock Purchase Agreements (PSPAs) with Treasury. The PSPAs do not allow for dividends 

However, for illustrative purposes, if dividend payments were subtracted from the projected cumulative 

amounts would reach $121 billion under Scenario 1, $124 billion under Scenario 2, and $193 billion undividends to date have been paid from funds acquired with additional draws. The projections show a p

dividends being paid out of comprehensive income. 

5

Figure 2: Cumulative Treasury Draws less dividends paid ($ in billions) 

Fannie Mae Freddie Mac

Cumulative draw less dividends Cumulative draw less divide

$200 $110 

Scenario 3 $159 Scena

$158 $160 $90 $144 

$105

$103 $104 $96

$122 Scenario 2 Scenario 2 $120 $110 $70 

$59 $52 

$58

$66 $65 $102 $88 

$80 $50 $85 $54 $73 $80 $46 $51 $40 $30 

2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2

Scenario 1 Scenario 1 

Cumulative Treasury Draw through 2014 Cumulative Treasury Draw through 2014 

Scenario 1 Scenario 2 Scenario 3 Scenario 1 S

Related to operating losses and other* $105 $110 $161 Related to operating losses and other* $58 Related to senior preferred dividends 40 40 58 Related to senior preferred dividends 17 

Cumulative Treasury Draw $145 $150 $219 Cumulative Treasury Draw $75 

Senior preferred dividends (not financed Senior preferred dividends (not financed

through Treasury Draws) $20 $22 $18 through Treasury Draws) $22 

Total senior preferred dividends $60 $62 $76 Total senior preferred dividends $39 

*Operating losses and other refers to net losses reported on the income statement, changes in unrealized losses reported on the balance sheet, and the impact of other accounting changes for conIn accordance with Senior Preferred Stock Purchase Agreements (PSPAs), the Enterprises are not permitted to paydown the Treasury draw amounts, even if the Enterprises generate positive net 

Numbers may not foot due to rounding.
Federal Housing Finance Agency 

Enterprises’ Fin

Results (continued) 

Credit-related expenses, particularly the provision for credit losses, continue to drive projected Treasur

all three scenarios. Fannie Mae’s credit-related expenses increase by $57 billion from Scenario 1 to S

for Freddie Mac that increase amounts to $23 billion. Thus $80 billion of the projected $92 billion diffeTreasury draws across those scenarios is directly related to credit-related expense projections. 

Figure 3: Cumulative Financial Results (2009-2014) ($ in billions) 

Fannie Mae Freddie Mac 

Scenario 1 Scenario 2 Scenario 3 Scenario 1 Scenario 2 S

Revenues $112 $112 $110 $104 $104 Provision for credit losses (135) (139) (189) (64) (66) 

Other credit-related expenses1 (35) (35) (38) (26) (26) 

Total Credit-related Expenses/Losses (170) (174) (227) (90) (92) 

Other expenses2 (33) (33) (33) (26) (26) 

Net Income (Loss) ($91) ($94) ($150) ($12) ($14) 

Capital Change Net Income (91) (94) (150) (12) (14) 

Dividends (60) (62) (76) (39) (39) 

Other3 21 21 21 21 22 

Total Capital Change (130) (135) (204) (30) (31) 

Beginning Net Worth (12/31/2008) (15) (15) (15) (31) (31) 

Capital Deficit (2009-2014) (145) (150) (219) (61) (62) Senior Preferred Treasury Draw (2009-2014) 145 150 219 61 62 Cumulative Senior Preferred Treasury Draw4 $145 $150 $219 $75 $76 

Cumulative Draw less Dividends4 $85 $88 $144 $36 $36 

1Consists of foreclosed property expenses, SOP 03-3 losses, net, and other than temporary impairments. 2Consists of mark-to-market gains/losses, administrative expenses, tax expense/benefit and other expenses. 3Consists of change in accumulated other comprehensive income, and other accounting changes for consolidation and security impairments, less positive net worth 4Freddie Mac's cumulative draw includes $13.8 billion of Treasury draw received in 2008.

 Projected financial results assume that the Senior Preferred Stock Purchase Agreement (PSPA) commitment fee has been waived at both Enterprises.

 Numbers may not foot due to rounding. 

4 53 2 5 69 1 

6
Federal Housing Finance Agency 

Enterprises’ Fina

Results (continued) 

The Enterprises have received $169 billion from Treasury to maintain positive net worth. For the selecan additional $51 to $142 billion would be required to support the Enterprises over the projection perio

1 and 2, dividend payments to Treasury exceed additional Treasury draws. Per the terms of the SenioStock Purchase Agreements with Treasury, senior preferred stock accrues dividends at 10 percent pe

7

Figure 4: Additional Treasury Draws and Dividends (Jul 2011 through Dec 2014) ($ in billions) 

Current Draw 

as of 06/30/11 

Additional Additional 

Draw Dividends 

Fannie Mae $41 $45

10 Freddie Mac 26

Total $51 $71

Total 

Draw 

Total 

Dividends 

$104 $15 

65 13

$169 $28 

Scenario 1 Scenario 2 

Additional Additional Additional Ad

Draw Dividends Draw Di

$46 $47 $115 

11 26 27 

$57 $73 $142 

Scenari
o

oooooooo

Federal Housing Finance Agency 

Enterprises’ Fina

Comparison of October 2011 Projections to October 2010 Projections 

The projection period for the current projections and the previous projections runs three and a half yeaprojection period runs through the end of 2014. The prior projection period runs through the end of 20In the October 2011 projections, the ending combined cumulative Treasury draw is $1 billion lower for $51 billion lower for scenario 3 than the ending cumulative Treasury draw in the October 2010 projecti

difference can be attributed to three primary factors:

Actual results for the first year of the projection period were substantially better than projected. The 

combined Treasury draw was $19 billion lower for scenario 1 and $73 billion lower for scenario 3 th

projections (See Figure 5). This factor is partially offset by the next two factors.Projected Treasury draws for the remainder of the initial projection period were $14 billion higher fo

$16 billion higher for scenario 3 in the October 2011 projections; and

The projection period has been extended through 2014, adding $3 billion in Treasury draws for sce

billion in Treasury draws for scenario 3.

Drivers of the differences in the projected pattern of financial results include the following factors:

Recent observed trends show that borrowers with high MTM LTV loans and modified loans are per

previously projected.The number of serious delinquent loans has declined as transition rates to later stages of delinquenpreviously projected.Foreclosure delays pushed some defaults into later years of the projection period and beyond.Recent observed trends indicate higher REO sales prices than previously projected.Net interest income is higher in the current projection results due to lower interest rates, resulting in costs and slightly higher average portfolio balances, driven by slower portfolio liquidations than preThe house price path in scenario 3 used in the current projections is better through the second qua

thereafter, compared to the corresponding house price path used in the October 2010 projections.

8
Federal Housing Finance Agency 

Enterprises’ Fin

Comparison of October 2011 Projections to October 2010 Projections (continued) 

9

Figure 5: Comparison of Oct 2011 Projections to Oct 2010 Projections ($ in billions) 

Scenario 1 Scenario 2 

October 2010 Projections Beginning Cumulative Draw 6/30/10 148 148 Projected Treasury draw - Year 1 (Second half of 2010 and first half of 2011) 39 50 

Projected Treasury draw - Years 2-31/2 (Second half of 2011; 2012 and 2013) 34 40 

Ending Cumulative Draw 2013 221 238 October 2011 Projections Beginning Cumulative Draw 6/30/10 148 148 Actual Treasury draw - Year 1 (Second half of 2010 and first half of 2011) 21 21 

Beginning Cumulative Draw 6/30/11 169 169 Projected Treasury draw - Years 2-31/2 (Second half of 2011; 2012 and 2013) 48 56 

Projected Treasury draw - Year 31/2‐41/2 (2014) 3 1 

Ending Cumulative Draw 2014 220 226 Difference in ending Cumulative Draw Actual versus Projection - Year 1 (Second half of 2010 and first half of 2011) (19) (29) 

Difference in Projections - Years 2-31/2 (Second half of 2011; 2012 and 2013) 14 16 

Additional year of Projection (2014) 3 1 

Total difference in ending cumulative draw (1) (12) 

Numbers may not foot due to rounding 
Federal Housing Finance Agency 

Enterprises’ Fin

Comparison of October 2011 Projections to October 2010 Projections (continued) 

Actual and forecasted house price paths for Scenarios 1 and 2 used in the October 2011 projections acompared to the corresponding house price paths used in the October 2010 projections. The house pScenario 3 used in the October 2011 projections is better through the second quarter of 2012 and wor

compared to the corresponding house price path used in the October 2010 projections. 

10

Figure 6: Comparison of Current and Previous House Price Paths 

Moody's house price paths (Case Shiller National Index; July 2011 vs. September 2010) 

120 

Stronger Near-term Rebound 

110 100 

90 80 

Deeper Second Recession 70 (Sep 2010) Deeper Second Recession

July 2011 60 

2Q10 1Q11 4Q11 4Q12 4Q13 4Q

July 2011 

Current Baseline 

July 2011 

Stronger Recovery 

(Sep 2010) 

Baseline 

(Sep 2010) 
Federal Housing Finance Agency 

Enterprises’ Fina

Projection Scenarios 

Key factors that influence the Enterprises’ financial results are listed in Figure 7. FHFA requested that project financial results for three scenarios. Because changes in house prices have had the largest im

Enterprises’ financial results, we chose to change only this factor across the three scenarios. 

11

Figure 7: Scenario Assumptions 

Factor Scenario 1 Scenario 2 Scenario 

House prices* Moody’s “Stronger Near-term 

Rebound” house price paths 

Moody’s “Current Baseline” house price paths 

Moody’s “Deeper SecRecession” house pric

Interest rates Future interest rates are implied by 

the forward curves as of June 30, 2011. 

Same as Scenario 1 Same as Scenario 1 

Securities prices ABS and CMBS prices fall by 5 

points at the beginning of the period 

Same as Scenario 1 Same as Scenario 1 

Agency MBS spreads 

Agency MBS spreads to swaps remain unchanged. 

Same as Scenario 1 Same as Scenario 1 

Credit Guarantee growth 

Zero growth in credit guarantees through year end 2014. 

Same as Scenario 1 Same as Scenario 1 

Retained Portfolio growth 

Additions to retained portfolios are limited to nonperforming loans bought out of pools backing Fannie Mae’s MBS and Freddie Mac’s PCs. 

Same as Scenario 1 Same as Scenario 1 

*Moody's house price paths as of July 2011
Federal Housing Finance Agency 

Enterprises’ Fi

House Price Assumptions 

House price changes have been the major driver of credit losses at the Enterprises. A wide range of ppaths exist for house prices at the national and local levels. Given the high level of uncertainty about oconditions in general and the U.S. housing markets in particular, FHFA directed the Enterprises to projresults for Moody’s current baseline and two additional house price paths. Moody’s considers “DeepeRecession” to be a downside alternative to the Current Baseline and “Stronger Near-term Rebound” to alternative to the Current Baseline. 

12

Figure 8: Moody’s House Price Paths (Case-Shiller National Index; July 2011) 

Descriptions 120 

Stronger Near-term Rebound 

Current Baseline 

1Q11 = 100 

Stronger Near-term Rebound (FHAn expansion of credit supports abovresult, house prices start to increase a

110 additional increases are minimal in 20

to-trough decline is 33% based on the Index. From the trough in 2Q11 to the period house prices increase by 12%permits reach an annual pace above quarter of 2012. 

100 

Current Baseline (FHFA Scenario 

90 Remaining home price declines contr

trough decline based on the Case-Sh

end of the trough in 1Q12 to the end of the fo

projection prices increase by 15%. Total new ho

80 annual pace above 1 million units by t

period 2012. 

Deeper Second Recession Deeper Second Recession (FHFA 

70 As a result of continuing high unemplo

rebound in housing construction that oof 2009 and then stalled reverses couresume their decline, bottoming out in 80% below their peak in 2005. The pe46% based on the Case-Shiller Natio

60 

1Q11 4Q11 4Q12 4Q13 4Q14 4Q15 trough in 4Q12 to the end of the forec

increase by 23%. 
Federal Housing Finance Agency 

Enterprises’ Fina

House Price Assumptions (continued) 

Selection of House Price Assumptions Figure 8 shows national-level paths for the Case-Shiller house price index associated with the selected price paths. Scenario 2 uses house price paths associated with Moody’s “Current Baseline (July 2011price path is derived from Moody’s assumptions regarding monetary and fiscal policy, U.S. dollar, and Scenario 1 and Scenario 3 use house price paths associated with better and worse economic performaMoody’s “Current Baseline (July 2011).” Moody’s describes the house price paths associated with “Stronger Near-term Rebound”, as being con10% probability that the economy will perform better than in this scenario, broadly speaking, and a 90% 

it will perform worse.” Conversely, Moody’s describes the house price paths associated with “Deeper 

Recession” as being consistent with “a 90% probability that the economy will perform better, broadly s10% probability that it will perform worse.” FHFA chose the “Deeper Second Recession” house price pstringent test that would provide information tied to a continued severe weakening in housing. 

Use of Moody’s Localized Forecasts FHFA chose to base the scenarios on Moody’s house price paths because Moody’s is a widely used bMoody’s provides a full set of quarterly, forward-looking house price paths for each of the 384 Metropo

Areas (MSAs) and Divisions for which FHFA publishes a historical house price index. FHFA does not 

prices. Such localized forecasts enable the Enterprises to project credit losses on a more comparable 

opposed to a simple national projection of peak-to-trough change in house prices, which would require to translate that house price path into its own local house price index. Defining a house price path at just the national level for the Enterprises would limit the usefulness of thbecause house prices often behave quite differently in different local markets. The mix of local market projections associated with a given national average price projection can have a substantial impact on 

loss projection for an Enterprise. Similarly, defining the path with only a peak-to-trough measure is pro

because the timing of the trough and the rate of recovery beyond the trough can also greatly affect exp

13
Federal Housing Finance Agency 

Enterprises’ Fina

Appendix Financial Projections Procedures 

FHFA directed the Enterprises to project revenue, mark-to-market gains and losses, credit-related expadministrative expenses, earnings, capital, and, ultimately, cumulative senior preferred Treasury draws scenarios using their own respective models. Both Enterprises routinely prepare financial forecasts us

respective management assumptions. Modeling assumptions were changed at both Enterprises to coassumptions listed in Figure 7. FHFA directed that the projection period cover the remainder of 2011 and the next three years, similar periods used by the Enterprises for routine management forecasts. Furthermore for the selected housby the end of the projection period the bulk of credit losses are recognized. The Enterprises’ models use projections of interest rates to calculate future net interest margins, gains the retained portfolio and derivatives used for hedging, and prepayment speeds on held or guaranteed 

which influence both credit losses and guarantee fee revenue. To project revenue, the Enterprises projected the size of the retained portfolios and credit guarantee bassumptions provided by FHFA on business volume growth. Additions to retained portfolios were limit

nonperforming loans bought out of pools backing Fannie Mae’s MBS and Freddie Mac’s PCs. The balaoutstanding credit guarantees at each Enterprise remained unchanged over the forecast period. Net interest income (which includes most of the Enterprises’ guarantee fee income) is driven primarily the retained portfolio and net interest margin (the difference between yield on assets and funding costsexercise, funding costs were influenced by the forward curve for swaps, and asset yields were influencforward curve for swaps and the assumptions about the level of Agency MBS spreads to swaps. Guarantee fee income is driven by the size of the credit guarantee book and guarantee fee pricing. To of the credit guarantee books the Enterprises used assumptions provided by FHFA on new business vinterest rates, which influence prepayment speeds on guaranteed mortgages. FHFA did not provide e

assumptions about guarantee fee pricing. However, FHFA reviewed the pricing assumptions of each 

14
Federal Housing Finance Agency 

Enterprises’ Fina

the projection period for consistency. For both Enterprises, guarantee fee pricing remained relatively uthe projection period. Projections of mark-to-market losses reflect changes in the value of securities held in the retained portchanges in the value of derivatives used for hedging. The Enterprises’ models use assumptions about 

rates, securities prices, and spreads to project gains and losses on securities held in the retained portfderivatives used to hedge interest rate risk. To project credit-related expenses, each Enterprise uses a multistep process. First, a statistical loan tr

projects the unpaid principal balance (UPB) of loans expected to default over the projection period. Ho

projections are used to determine the mark-to-market loan-to-value ratios of the guaranteed mortgagesinfluence the probabilities of default, and projections of loss given default. Next, a second model projeof losses associated with defaulted loans resolved through various processes. The projections of distrcombined with the projections of loss severities to arrive at credit losses for each quarter. Next, each projected loan loss reserves based on projections of credit losses, to determine its future provisions foFinally, projections of credit-related expenses incorporate projections of future provisions for credit lossproperty expenses, and expenses incurred after foreclosure on the property. The Enterprises used their own respective management assumptions to project administrative expensFHFA reviews models and methodologies for internal consistency and comprehensiveness as part of tsupervision of the Enterprises. However, as with other regulator-driven financial projections that rely omodels of banks, the internal models of one Enterprise will produce different answers than those of the same set of assumptions and other inputs. This modeling exercise is not the same as, nor did it follow all the same control procedures as the procformal financial reporting. For instance, the projections did not incorporate management judgment as specific assumptions employed might produce other changes in model assumptions. Nonetheless, FHthe results of this exercise provide a reasonable indication of plausible future Treasury draws under th

scenarios, using comparable key assumptions for each Enterprise. 

15