FEDERAL HOUSING FINANCE AGENCY
 

NEWS RELEASE
 

For Immediate Release 

October 26, 2012 

Contact: Corinne Russell (202) 649-3032 

Stefanie Johnson (202) 649-3030 

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 (PSPAs) with the U.S. 

Department of the Treasury. These updated projections show cumulative Treasury draws that 

are reduced and more stable compared to previous projections. The key drivers of those results 

include an overall reduction in actual and projected credit-related expenses and changes in the 

dividend structure contained in the PSPAs, which eliminates the need to borrow from Treasury 

to pay dividends. 

FHFA first released financial projections in October 2010, and has provided updates of those 

projections on an annual basis. Through the FHFA Conservator’s Report, FHFA reports actual 

performance versus projections on a quarterly basis. 

Attachment follows 

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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 2012 
Federal Housing Finance Agency 

Enterprises’ Fin

Contents 

Introduction 3 

Summary

.................................................................................. 

.................................................................................... 

4 

Results ....................................................................................... 5 Comparison of Oct 2012 Projections to Oct 2011 Projections................. 9 Projection Scenarios ..................................................................... 13 House Price Assumptions .............................................................. 14 Appendix...................................................................................... 16 

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Federal Housing Finance Agency 

Enterprises’ Fina

Introduction 

This report provides updated information on possible ranges of future financial results of Fannie Mae Mac (the “Enterprises”) under specified scenarios, using consistent assumptions for both Enterprises. with the Enterprises to develop forward-looking financial projections across three possible house price FHFA published updated projections of the Enterprises’ financial performance in October 2011, which in FHFA’s Projections of the Enterprises’ Financial Performance, October 2011. The projections have 

to reflect the current outlook for house prices, interest rates, trends in borrower behavior and amendm

terms of the Senior Preferred Stock Purchase Agreements (PSPAs) between the Treasury and each o

Enterprises. The projection period has been extended an additional year to 2015.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 market conditions, and house prices. The projections do not define the full range of possible outcomeoutcomes may be very different. This effort should be interpreted as a sensitivity analysis of future finpossible house price paths.FHFA provided the Enterprises with key assumptions for each scenario. The assumptions used in eacscenarios are described on page 14. The Enterprises used their respective internal models to project results based on the assumptions provided by FHFA. While this effort achieves a degree of comparathe Enterprises, it does not allow for actions that the Enterprises might undertake in response to the e

conditions specified in the scenarios. Those Enterprise-specific business changes could lead to differ

across the scenarios than are presented in these projections.

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Federal Housing Finance Agency 

Enterprises’ Fin

Summary Projected Treasury Draws and Dividends To date, the Enterprises have drawn $187.5 billion from Treasury under the terms of the PSPAs. Under scenarios used in the projections, cumulative Treasury draws (including draws required to pay di

end of 2015 range from $191 billion to $209 billion. If dividend payments were subtracted from the pr

cumulative draws, the net combined amounts for both Enterprises would range from $67 billion to $138 b

previous projections released in October 2011, cumulative Treasury draws (including draws required to pthe end of 2014 ranged from $220 billion to $311 billion. For the selected scenarios, in the current projections, an additional $3 to $22 billion would be required to Enterprises over the projection period. Freddie Mac would not require additional Treasury draws afteof the three scenarios. Fannie Mae would not require additional Treasury draws after 2012 in two 

scenarios. Furthermore, over the projection period the Enterprises pay additional dividends of $7

Scenario 1 to $32 billion in Scenario 3. 

October 2012 Projections versus October 2011 Projections 

The projection period for the current projections and the previous projections runs three and a half yea

current projection period runs through the end of 2015. The prior projection period ran through the endifference in the range of ending cumulative Treasury draws between the October 2012 projections an2011 projections can be attributed to three primary factors:

o Actual financial results for the first year of the projection period in the October 2011 projections 

half of 2011 and the first half of 2012) were substantially better than projected.

o Updated projections of financial results for the remaining two and a half years of the projection 

October 2011 projections (the second half of 2012; 2013 and 2014) are substantially better thaprojections.

o Changes to the PSPAs, effective January 1, 2013, which replace a fixed 10 percent dividend o

preferred stock with a sweep of net worth, effectively ends the contribution of dividends to projedraws.

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Federal Housing Finance Agency 

Enterprises’ Fina

Results 

In the current projections, Freddie Mac would not require additional Treasury draws after 2012 in any 

scenarios. Fannie Mae would not require additional Treasury draws after 2012 in two of the three sceprojected combined cumulative Treasury draws for both Enterprises through December 31, 2015 reacunder Scenario 1, $196 billion under Scenario 2, and $209 billion under Scenario 3. Fannie Mae’s cdraws are higher than Freddie Mac’s in part because Fannie Mae’s mortgage book of business is apppercent larger than Freddie Mac’s. Figure 1: Cumulative Treasury Draws* ($ in billions) 

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$90 

$116 $122 $122 $122 $122 

$118 $118 $118 $118 

$75 

$128 $132 $133 $133 

$40 $80 

$120 $160 

2009 2010 2011 2012 2013 2014 2015 

Fannie Mae 

Cumulative draw including dividends 

Scenario 3 

Scenario 1 

Scenario 2 

*Includes any projected net def icit at the end of 2015 

Freddie Mac 

Cumulative draw includi

$100 Scen

Scenario 2 

$71 $74 

$80 $76 

$73 

$60 $64 

$51 

$40

2009 2010 2011 2012 
Federal Housing Finance Agency 

Enterprises’ Finan

Results (continued) 

The PSPAs do not allow for dividends to reduce prior draws. However, for illustrative purposes, if divisubtracted from the projected cumulative draws, the net combined amounts for both Enterprises woul

under Scenario 1, $76 billion under Scenario 2, and $132 billion under Scenario 3. Prior to 2012, mospaid from funds acquired with additional draws. Given the changes to the PSPAs, after 2012 all future 

projected to be paid out of comprehensive income. Figure 2: Cumulative Treasury Draws ($ in billions) 

Fannie Mae Fre

Scenario 1 Scenario 2 Scenario 3 Scenario 1 S

Related to operating losses and other* $97 $100 $109 $64 

Related to senior preferred dividends 21 22 25 8 

Cumulative Treasury Draw $118 $122 $133 $73 

Senior preferred dividends (paid from comprehensive income) $48 $46 $15 $46 Total senior preferred dividends $69 $69 $39 $54 

Cumulative Treasury Draw less dividends $49 $53 $94 $18 

*Operating losses and other refers to net losses reported on the income statement, changes in unrealized losses reported on the balance sheet, and the accounting changes for consolidation and security impairments. In accordance with the terms of the Senior Preferred Stock Purchase Agreements (PSpermitted to paydown the Treasury draw amounts, even if the Enterprises generate positive net income or total comprehensive income. Numbers may n

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Federal Housing Finance Agency 

Enterprises’ Fin

Results (continued) . 

From the end of 2008 through the end of 2015, the total combined capital change is projected to rangreduction of $131 billion to a reduction of $150 billion. The primary driver is credit-related expenses, wacross the scenarios as the house price paths become more pessimistic. 

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Figure 3: Cumulative Financial Results (2009-2015) ($ in billions) 

Scenario 1 Scenario 2 Scenario 3 Scenario 1 Scen

Revenues $147 $146 $143 $121 

Provision for credit losses (119) (123) (159) (63) 

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

Total Credit-related Expenses/Losses (155) (158) (197) (90) 

Other expenses2 (42) (42) (43) (35) 

Net Income (Loss) (50) (55) (96) (4) 

Capital Change Net Income (50) (55) (96) (4) 

Dividends (69) (69) (39) (54) Other3 17 16 17 30 

Total Capital Change (103) (107) (118) (28) 

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

Capital Deficit (2009-2015) (118) (122) (133) (59) Senior Preferred Treasury Draw (2009-2015) 118 122 133 59 Cumulative Senior Preferred Treasury Draw4 $118 $122 $133 $73 

Cumulative Draw less Dividends4 $49 $53 $94 $18 

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 posit4Freddie Mac's cumulative draw includes $13.8 billion of Treasury draw received in 2008.

 Numbers may not foot due to rounding. 

Fannie Mae Fredd
Federal Housing Finance Agency 

Enterprises’ Fin

Results (continued) 

The Enterprises have received $187.5 billion from Treasury to maintain positive net worth. For the sescenarios an additional $3 to $22 billion would be required to support the Enterprises over the projectFreddie Mac the additional Treasury draws occur only in 2012 for all three scenarios. For Fannie Mae Treasury draws occur only in 2012 for Scenario 1 and Scenario 2, and in multiple years in Scenario 3over the projection period the Enterprises pay additional dividends of $78 billion in Scenario 1 to $32 bScenario 3. The majority of the additional dividends are projected to be paid out of comprehensive inc

current projections. 

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Figure 4: Additional Treasury Draws and Dividends (Jul 2012 through Dec 2015) ($ in billions) 

Total 

Draw 

Total 

Dividends 

Additional 

Draw 

Additional 

Dividends 

Additional 

Draw 

Additional 

Dividends 

Addition

Draw 

Fannie Mae $116 $26 $2 $44 $6 $43 $17 

Freddie Mac 71 20 1 34 2 30 5 

Total $187 $46 $3 $78 $8 $73 $22 

Current Draw 

as of 06/30/12 

Scenario 1 

. 

Scenario 2 

. 

Sce
o

oo

o

Federal Housing Finance Agency 

Enterprises’ Fina

Comparison of October 2012 Projections to October 2011 Projections 

Several factors contributed to lower projected Treasury draws in the current projections. Credit-related expenses o The projected provision for credit losses for all three scenarios is lower in the current projection tha

projection due to improvements in projected house price paths and in the number of delinquent loaprojection period.

o The actual house price path over the past year was more positive than the house price paths used 

(Scenario 2) and Deeper Second Recession (Scenario 3) house price paths in the previous projecMoody’s projected house price paths are more optimistic in the current projections for almost all thRecent observed trends indicate higher REO sales prices than previously projected.

Dividends 

In previous projections, dividends on senior preferred stock outstanding contributed substantially to draws. Changes to the PSPAs, effective in 2013, that replace a fixed 10 percent dividend on seniooutstanding with a variable dividend based on net worth above a defined threshold effectively enddividends to Treasury draws.In contrast to previous projections, after 2012, the Enterprises do not draw from the Treasury to pa

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Federal Housing Finance Agency 

Enterprises’ Fina

Comparison of October 2012 Projections to October 2011 Projections (continued) 

Actual financial results for the first year of the projection period in the October 2011 projections (the sethe first half of 2012) were substantially better than projected. Additionally, updated projections of fina

remaining two and a half years of the projection period in the October 2011 projections (the second ha2014) are substantially better than in previous projections. Furthermore, the extension of the projectioresulted in no additional Treasury draws. 

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Figure 5: Comparison of Oct 2012 Projections to Oct 2011 Projections ($ in billions) 

October 2011 Projections 

Beginning Cumulative Draw -- June 30, 2011 $169 $169 $169 

Projected Treasury Draws 

Year 1 (2nd half of 2011 and 1st half of 2012) 36 41 91 

Years 2-31/2 (2nd half of 2012; 2013 and 2014) 15 15 52 

Ending Cumulative Draw -- December 31, 2014 $220 $226 $311 

October 2012 Projections 

Beginning Cumulative Draw 

Beginning Cumulative Draw -- June 30, 2011 $169 $169 $169 

Actual Treasury draw - Year 1 (2nd half of 2011 and 1st half of 2012) 19 19 19 

Beginning Cumulative Draw -- June 30, 2012 187 187 187 Projected Treasury Draws 

Years 2-31/2 (2nd half of 2012; 2013 and 2014) 3 8 22 

Year 31/2-41/2 (2015) 0 0 0 

Ending Cumulative Draw -- December 31, 2015 $191 $196 $209 

Difference in ending Cumulative Draw 

Actual versus Projection - Year 1 ($17) ($23) ($72) 

Difference in Projections - Years 2-31/2 (12) (7) (30) 

Additional year of Projection (2015) 0 0 0 

Total difference in ending cumulative draw ($29) ($30) ($102) 

Numbers may not foot due to rounding 

Scenario 1 Scenario 2 Scenario 3
Federal Housing Finance Agency 

Enterprises’ Fin

Comparison of October 2012 Projections to October 2011 Projections (continued) 

For Scenarios 2 and 3, actual and forecasted house price paths through 2012 used in the October 20are better compared to the corresponding house price paths used in the October 2011 projections. Tpath in Scenario 1 used in the October 2012 projections is slightly worse through 2012 compared to tcorresponding house price path used in the October 2011 projections. Figure 7: Comparison of Current and Previous House Price Paths 

90 95 

100 105 110 

Q1 Q2 Q3 Q4 Q5 Q6 Q7 

Stronger Near-term Rebound Path 

(Scenario 1) 

October 2012 Projections 

October 2011 Projections 

90 95 

100 105 110 

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 

Baseline Path 

(Scenario 2) 

October 2012 Projections 

October 2011 Projections 

80 85 90 95 

100 105 110 

Q1 Q2 Q3 Q4 Q5 Q6 Q7 

Deeper Second Recession Path 

(Scenario 3) 

October 2012 Proj

October 2011 Projections 

80 85 90 95 

100 105 110 

1Q11 2Q11 3Q11 4Q11 1Q12 

Actual House Price Path 

versus 

October 2011 Projections House Price Paths 

Deeper Second Recession

(Scenario 3) 

Baseline 

(Scenario 2) 

Actual Stronger Near-term Rebound 

(Scenario 1) 

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Federal Housing Finance Agency 

Enterprises’ Fin

Comparison of October 2012 Projections to October 2011 Projections (continued) 

Delinquent loan counts at the beginning of the projection period for both Enterprises are significantly lto previous projections. 

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Figure 8: Comparison of Delinquent Loan Counts (in thousands) 

424 384 344

1070

864

737

0

400800

1,2001,600

Jun‐10 Jun‐11 Jun‐12

Total Delinquent Loans

Fannie Mae

13% decline 

241 221 194554 469 428

0

400800

1,2001,600

Jun‐10 Jun‐11 Jun‐12

Total Delinquent Loans

Freddie Mac

60De30

10% decline 
Figure 9: 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 SecoRecession” house pric

Interest rates Future interest rates are implied by 

the forward curves as of June 30, 2012. 

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 2015. 

Same as Scenario 1 Same as Scenario 1 

Retained Portfolio growth 

The size of the retained portfolios are in accordance with the terms of the PSPAs, and additions to the 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 2012

Federal Housing Finance Agency 

Enterprises’ Fina

Projection Scenarios 

Key factors that influence the Enterprises’ financial results are listed in Figure 9. FHFA requested that project financial results for three scenarios. Because changes in house prices have had the largest imEnterprises’ financial results, we chose to change only this factor across the three scenarios. 

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Federal Housing Finance Agency 

Enterprises’ Fina

House Price Assumptions 

House price changes have been the major driver of credit losses at the Enterprises. A wide range of paths exist for house prices at the national and local levels. Given the high level of uncertainty about economic conditions in general and the U.S. housing markets in particular, FHFA directed the Enterpr

financial results for Moody’s current baseline and two additional house price paths. Moody’s consider

Second Recession” to be a downside alternative to the Current Baseline and “Stronger Near-term Reupside alternative to the Current Baseline. Figure 10: Moody’s House Price Paths (Case-Shiller National Index; July 2012) 

60 70 80 90 

100 110 120 

1Q12 4Q12 4Q13 4Q14 4Q15 4Q16 

Stronger Near-term Rebound 

Deeper Second Recession 

Current Baseline 

end of 

projection 

period 

1Q12 = 100 

Descriptions Stronger Near-term Rebound (FHFA ScAn expansion of credit supports the above-ba result, there are no further declines in housadditional increases are minimal in 2012 and trough decline is 34% based on the Case-ShFrom the trough in 4Q11 to the end of the foprices increase by 17%. Stronger demand aconfidence will help propel total new housing the annual pace of 1 million units by the fouryear earlier than in the baseline. Current Baseline (FHFA Scenario 2) Remaining home price declines contribute to trough decline based on the Case-Shiller Nathe trough in 4Q11 to the end of the forecast increase by 17%. Given the recent weakeninthe odds of a third round of quantitative easinsubstantially and are now assumed in the banew housing permits reach an annual pace aby the fourth quarter of 2013. Deeper Second Recession (FHFA ScenaA relatively painful second U.S. recession deless severe than the 2008-2009 downturn. Rduring the recession causes the housing mafurther. Housing starts resume their decline, third quarter of 2013, 75% below their peak ito-trough house price decline is 43% based oNational Index. From the trough in 3Q13 to tforecast period house prices increase by 16%

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Federal Housing Finance Agency 

Enterprises’ Fina

House Price Assumptions (continued) 

Selection of House Price Assumptions Figure 10 shows national-level paths for the Case-Shiller house price index associated with the select

house price paths. Scenario 2 uses house price paths associated with Moody’s “Current Baseline (Juhouse price path is derived from Moody’s assumptions regarding monetary and fiscal policy, U.S. dollprices. Scenario 1 and Scenario 3 use house price paths associated with better and worse economic relative to Moody’s “Current Baseline (July 2012).” 

Moody’s describes the house price paths associated with “Stronger Near-term Rebound”, as being co10% probability that the economy will perform better than in this scenario, broadly speaking, and a 90that it will perform worse.” Conversely, Moody’s describes the house price paths associated with “DeeRecession” 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 a stringent 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 MetropoAreas (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 Enterprise 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 tbecause house prices often behave quite differently in different local markets. The mix of local markeprojections 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 pr

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

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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 exp

administrative expenses, earnings, capital, and, ultimately, cumulative senior preferred Treasury drawthree scenarios using their own respective models. Both Enterprises routinely prepare financial forecarespective management assumptions. Modeling assumptions were changed at both Enterprises to co

assumptions listed in Figure 9. FHFA directed that the projection period cover the remainder of 2012 and the next three years, similaperiods used by the Enterprises for routine management forecasts. Furthermore for the selected houby 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 limnonperforming loans bought out of pools backing Fannie Mae’s MBS and Freddie Mac’s PCs. The baoutstanding 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 costexercise, funding costs were influenced by the forward curve for swaps, and asset yields were influenforward 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. T

size of the credit guarantee books the Enterprises used assumptions provided by FHFA on new busininterest 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 

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Federal Housing Finance Agency P

Enterprises’ Finan

the projection period for consistency. For both Enterprises, guarantee fee pricing increased in 2012 as 

the Temporary Payroll Tax Cut Continuation Act and FHFA, and remain relatively unchanged over the period. Projections of mark-to-market losses reflect changes in the value of securities held in the retained porchanges in the value of derivatives used for hedging. The Enterprises’ models use assumptions abou

rates, securities prices, and spreads to project gains and losses on securities held in the retained portderivatives used to hedge interest rate risk. To project credit-related expenses, each Enterprise uses a multistep process. First, a statistical loan tprojects the unpaid principal balance (UPB) of loans expected to default over the projection period. H

projections are used to determine the mark-to-market loan-to-value ratios of the guaranteed mortgageinfluence the probabilities of default, and projections of loss given default. Next, a second model proje

of losses associated with defaulted loans resolved through various processes. The projections of distcombined 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 losproperty 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 supervision 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 th

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 profor formal financial reporting. For instance, the projections did not incorporate management judgment 

specific assumptions employed might produce other changes in model assumptions. Nonetheless, FH

that the results of this exercise provide a reasonable indication of plausible future Treasury draws und

scenarios, using comparable key assumptions for each Enterprise. 

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