FEDERAL HOUSING FINANCE AGENCY 

NEWS RELEASE 

For Immediate Release Contact: Corinne Russell (202) 414-6921 

October 21, 2010 Stefanie Johnson (202) 414-6376 

FHFA Releases Projections Showing Range of Potential Draws 

for Fannie Mae and Freddie Mac 

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

of the financial performance of Fannie Mae and Freddie Mac (the Enterprises) including 

potential draws under the Preferred Stock Purchase Agreements (PSPAs) with the U.S. 

Department of the Treasury. To date, the Enterprises have drawn $148 billion from the 

Treasury Department under the terms of the PSPAs. Under the three scenarios used in the 

projections, cumulative Enterprise draws range from $221 billion to $363 billion through 2013. 

FHFA worked with the Enterprises to develop consistent, forward-looking projections across 

three possible house price paths. The approach taken in developing these projections is based 

roughly on the approach taken by the federal banking agencies last year in the Supervisory 

Capital Assessment Program, which produced potential, not expected outcomes. 

“These projections are intended to give policymakers and the public useful snapshots of 

potential outcomes for the taxpayer support of Fannie Mae and Freddie Mac,” said FHFA 

Acting Director Edward J. DeMarco. “These are not predictions; the results reflect the potential 

effects of a limited set of hypothetical changes in house prices, a key variable driving credit 

losses for the Enterprises.” 

The projected credit losses in each scenario primarily reflect possible further losses on the 

Enterprises’ pre-conservatorship mortgage business. As time passes, Enterprise dividend 

payments on Treasury preferred stock make up larger portions of the draws. Under the 

scenarios used in the projections, if dividend payments on preferred stock were excluded, 

cumulative Enterprise draws range from $142 billion to $259 billion. 

“Much like the recently published Conservator’s Report, FHFA is releasing these projections to 

enhance public understanding of Fannie Mae’s and Freddie Mac’s financial performance,” 

DeMarco said. 

FHFA will periodically update and refine these projections and will report the updates 

as part of its Conservator’s Report. 

(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 $5.9 trillion in funding for the U.S. mortgage markets 

and financial institutions. 
Federal Housing Finance Agency 

Projections of the Enterprises' Financial Performanc

October 2010 
2

Federal Housing Finance Agency Enterprises’ Fin

Contents 

Purpose..................................................................... 3 

Approach.................................................................. 3 Projection Scenarios................................................... 4 House Price Assumptions............................................. 5 Results..................................................................... 7 Appendix ................................................................. 11 
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

Federal Housing Finance Agency 

Enterprises’ Fin

Purpose 

The purpose of this report is to provide the public with information on possible future Treasury dMae and Freddie Mac (the “Enterprises”) under specified scenarios, using consistent assumptioEnterprises. FHFA will periodically update and refine these projections and will report such updits Conservator’s Report.To date, the Enterprises have drawn $148 billion from the U.S. Treasury under the terms of the Preferred Stock Purchase Agreements (PSPAs), as amended, between the Treasury and each Enterprises.To provide a sense of the Enterprises’ possible future draws under the PSPAs, FHFA worked wEnterprises to develop consistent forward-looking financial projections. The results do not definof possible outcomes. This effort should be interpreted as a sensitivity analysis of future draws 

house price paths.

Approach 

The approach taken in developing these projections is based roughly on the approach taken by banking agencies last year in the Supervisory Capital Assessment Program (SCAP).1 FHFA proEnterprises with key assumptions for each scenario. The Enterprises used their respective interproject their financial results based on the assumptions provided by FHFA.As with SCAP, the results here are not expected outcomes. They are modeled projections in reif” exercises based on assumptions about Enterprise operations, financial market conditions, anWhile this effort achieves a degree of comparability between the Enterprises, it does not allow fo

the Enterprises might undertake in response to the economic conditions specified in the scenarEnterprise-specific business changes could lead to different results across the scenarios than athese projections.

1 The Supervisory Capital Assessment Program stress tests were conducted by the Federal Reserve System, the Federal Deposit Insura

the Office of the Comptroller of the Currency to assess the capital adequacy of U.S. domestic bank holding companies with assets above 

3
Projection Scenarios 

Key factors that influence the Enterprises’ financial results are listed in Figure 1. 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. 

Figure 1: Scenario Assumptions 

Factor Scenario 1 Scenario 2 

House prices* Interest rates Securities prices Agency MBS spreads Credit Guarantee growth Retained Portfolio growth 

Moody’s “Stronger Near-term 

Recovery” house price path 

Future interest rates are implied by 

the forward curve for swaps as of June 30, 2010 

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 end 2013 Additions to retained portfolios are limited to nonperforming loans bought out of pools backing Fannie Mae’s MBS and Freddie Mac’s PCs 

Moody’s “Current Baseline” house price paths 

Same as Scenario 1 Same as Scenario 1 Same as Scenario 1 Same as Scenario 1 Same as Scenario 1 

Moody’s “DRecession” 

Same as SceSame as SceSame as SceSame as SceSame as Sce

*Moody's scenarios as of September 2010

Federal Housing Finance Agency 

Enterprises’ Fina

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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 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 Recovery” to alternative to the Current Baseline. 

5

Current Baseline 

projection

period 

2Q10 = 100 

Figure 2: House Price Assumptions 

Moody's house price paths (Case Shiller National Index; September 2010) Moodys House Price Paths Moody's descriptions are in quo

120 Current Baseline (FHFA Scen

end of "Small remaining home price de

Stronger Near-term Recovery 34% peak-to-trough decline. Fro

110 to the end of the forecast period 

increase by 8%. 

100 Stronger Near-term Recovery 

“Increased access to credit suppbaseline growth. As a result, the 

90 house prices are sustained, alth

increases are minimal in 2010 ato-trough decline is 31%. From 

80 the end of the forecast period ho

by 5%. Deeper Second Recession (F

70 “As a result of restricted access 

Deeper Second Recession continuing high unemployment, 

rebound in housing construction 

60 the first half of 2009 not only pa

course." The peak-to-trough dectrough in 1Q12 to the end of the house prices increase by 11%. 

2Q10 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15
Federal Housing Finance Agency 

Enterprises’ Fina

House Price Assumptions (continued) 

Selection of House Price Assumptions Figure 2 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 (Septembehouse price path is derived from Moody’s assumptions regarding monetary and fiscal policy, U.S. dollaprices. Scenario 1 and Scenario 3 use house price paths associated with better and worse economic relative to Moody’s “Current Baseline (September 2010).” Moody’s describes the house price paths associated with “Stronger Near-term Recovery,” as being co

10% 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.” As with the SCAP exercise, FHFA chose the “Deeper Secohouse price path to ensure a stringent test that would provide information tied to a continued severe whousing. 

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

6
Results 

The projected combined cumulative Treasury draw for both Enterprises through December 31, 2013 reunder Scenario 1, $238 billion under Scenario 2, and $363 billion under Scenario 3. The cumulative prthrough 2013 for Fannie Mae under each scenario is approximately double the projected draw for Fred

because Fannie Mae’s mortgage book of business is forty-five percent larger than Freddie Mac’s. 

Figure 3: Cumulative Treasury Draws* ($ in billions) 

Fannie Mae Freddie Mac 

$280 $280 

$257 

$85 

$104 

$140 

$159 $162 

$102 

$130 

$147 $150 

$113 

$179 

$232 

Scenario 3 

Scenario 2 

$240 $240 $200 $200 

Scenario 3 

$160 $160 

$120 $120 

$73 $83 

$80

$75

$80 

$70 

Scenario 1 $63 $40 $40 $51 Scen

2009 2Q10 2010 2011 2012 2013 2009 2Q10 2010 

Includes any projected net deficit at the end of 2013 

Federal Housing Finance Agency 

Enterprises’ Fin

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Federal Housing Finance Agency 

Enterprises’ Fina

Results (continued) 

Credit-related expenses, particularly the provision for credit losses, are the primary driver of projected across all three scenarios. Fannie Mae’s credit-related expenses increase by $85 billion from Scenari3, and for Freddie Mac that increase amounts to $28 billion. Thus $113 billion of the projected $142 b

in Treasury draws across those scenarios is directly related to credit-related expense projections. 

8

Figure 4: Cumulative Financial Results (2009-2013) ($ in billions) 

Fannie Mae Freddie Mac 

Scenario 1 Scenario 2 Scenario 3 Scenario 1 Scenario 2 S

Revenues $86 $86 $81 $77 $77 

Provision for credit losses (140) (148) (219) (56) (61) 

Other credit-related expenses (30) (31) (37) (21) (21) 

Total Credit-related Expenses/Losses (170) (179) (255) (77) (82) 

Other expenses1 (26) (27) (27) (20) (20) 

Net Income (Loss) ($110) ($119) ($202) ($21) ($26) 

Capital Erosion Net Income (110) (119) (202) (21) (26) 

Dividends (49) (51) (65) (31) (33) 

Other2 24 24 25 25 27 

Total Capital Erosion (135) (147) (242) (27) (31) 

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

Capital Deficit (2009-2013) (150) (162) (257) (57) (62) 

Senior Preferred Treasury Draw (2009-2013) $150 $162 $257 $57 $62 Cumulative Senior Preferred Treasury Draw3 $150 $162 $257 $71 $76 

Cumulative Draw excluding Dividends3 $102 $111 $192 $40 $43 

1Consists of mark-to-market gains/losses, administrative expenses, tax expense/benefit and other expenses. 2Consists of change in accumulated other comprehensive income, plus FAS 115-2 and consolidation accounting adjustments, less positive net worth as of 12/31/3Freddie Mac's cumulative draw includes $13.8 billion of Treasury draw received in 2008.

 Numbers may not foot due to rounding. 

9 76 5 

12 95 5 
Results (continued) 

From 2007 through the second quarter of 2010 the Enterprises’ provisions for credit losses have been by increases to loan loss reserves. However, charge-offs increase during the latter years of the projectnon-performing loans are ultimately resolved. Figure 5: Single-Family Cumulative Credit Losses (2009-2013) ($ in billions) 

Fannie Mae Freddie Ma

$200 $200 

$23 

$42 

$8 

$24 

$52 

$22 

$4

$0 

$40 $80 

$120 $160 

Scenario 3 

$42 

$80 

$112 

$132 

$13 

$43 

$91 

$142 

$181 

$42 

$77 

$106 

$125 

$0 

$40 $80 

$120 $160 

Scenario 2 

Scenario 3 

2009 2010 2011 2012 2013 2009 2010 2011 

Credit losses are defined as charge-offs and foreclosed property expenses. 

Federal Housing Finance Agency 

Enterprises’ Finan

9
Results (continued) 

Federal Housing Finance Agency 

Enterprises’ Fina

The Enterprises have already received $148 billion from the U.S. Treasury to maintain positive net worselected scenarios an additional $73 to $215 billion would be required to further support the Enterpriseprojection period. Of those amounts $67 billion to $91 billion represent dividend payments to Treasury 

of senior preferred stock in the Enterprises. Per the terms of the Senior Preferred Stock Purchase Agr

the U.S. Treasury, senior preferred stock accrues dividends at 10 percent per year. 

10

Figure 6: Additional Treasury Draws and Dividends (Jul 2010 through Dec 2013) ($ in billions) 

Projected Additional Draw and Dividends through 2013 

Current Draw

as of 6/30/10

Total 

Draw 

Total 

Dividends 

$85 $6 

63 7

$148 $13 

Additional Additional 

Draw Dividends 

Scenario 1 Scenario 2 Scenario 

Fannie Mae $65 $43

8 Freddie Mac 24

Total $73 $67

Additional Additional 

Draw Dividends 

$77 $45 

13 26

$90 $71 

Additional Ad

Draw Div

$172 

43 

$215 
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 usrespective management assumptions. Modeling assumptions were changed at both Enterprises to coassumptions listed in Figure 1. FHFA directed that the projection period cover the remainder of 2010 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 limitnonperforming 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 on new business volume anwhich influence prepayment speeds on guaranteed mortgages. FHFA did not provide explicit assump

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Federal Housing Finance Agency 

Enterprises’ Finan

guarantee fee pricing. However, FHFA reviewed the pricing assumptions of each Enterprise for the foconsistency. For both Enterprises, guarantee fee pricing remained relatively unchanged over the forec

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 the future values of securities held in the retained portfogains and losses. Future values of derivatives used to hedge interest rate risk are based on the projecinterest rates. 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. Hoprojections 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 proje

of 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 forecast administrative expenFHFA 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 o

models 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. 

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