Federal Housing Finance Agency 

Projections of the Enterprises’ Financial Performance 

(Stress Tests) 

April 30, 2014 
   

Federal Housing Finance Agency Projections of the Enterprises’ Financial Performance 

April 2014 

Contents 

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

Background.................................................................................. 4
 

Scenario Assumptions.......................................................................... 5
 

Dodd-Frank Act Stress Test (DFAST)
 

Severely Adverse Scenario Results ......................................................... 6 

FHFA Scenarios Results.................................................................. 7
 

DFAST Severely Adverse Scenario vs. FHFA Scenario 3........................... 8
 

Comparison of House Price Paths............................................................ 9
 

FHFA Scenarios Results Over Time....................................................... 10
 

2 
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Summary 

Dodd-Frank Act Stress Tests 

Severely Adverse Scenario 

As of September 30, 2013, the Enterprises 

have drawn $187.5 billion from the U.S. 

Treasury under the terms of the Senior Preferred Stock Purchase Agreements (the 

“PSPAs”). 

The combined remaining funding commitment under the PSPAs as of September 30, 

2013 was $258.1 billion. 

In the Severely Adverse scenario, incremental Treasury Draws range between 

$84.4 billion and $190.0 billion depending 

on the treatment of deferred tax assets. 

The remaining funding commitment under 

the PSPAs ranges between $173.7 billion 

and $68.0 billion. 

 

$68.0 

$0 

$100 

$200 

$300 

$400 

$500 

Without valuation 

allowance on 

Deferred Tax 

Assets 

With valuation 

allowance on 

Deferred Tax 

Assets 

Dodd-Frank Act Stress Tests 

Severely Adverse Scenario Results 

Enterprises Combined 

Remaining PSPA 

Funding 

Commitment 

Potential 

Incremental 

Treasury Draw 

Cumulative 

Treasury Draw as 

of 9/30/13 

Dollars in billions 

No incremental senior preferred dividends paid in this scenario. 

Source: FHFA 

$173.7 

$84.4 

$190.0 

$187.5 $187.5 

FHFA Scenarios 

In the FHFA scenarios, cumulative, combined Treasury draws at the end of 2015 

remain unchanged at $187.5 billion as neither Enterprise requires additional Treasury 

draws in any of the three scenarios. 

The combined remaining commitment under the PSPAs is unchanged at $258.1 billion. 

In the three scenarios the Enterprises pay 

additional senior preferred dividends to the 

US Treasury ranging between $54.0 billion 

to $36.3 billion. 

 

 

 

$185.2 $185.2 $185.2 

$54.0 $51.9 $36.3 

$0 

$50 

$100 

$150 

$200 

$250 

Scenario 1 Scenario 2 Scenario 3 

FHFA Scenarios Results 

Enterprises Combined 

Potential 

Incremental 

Dividends to 

Treasury 

Cumulative Senior 

Preferred 

Dividends through 

9/30/13 

No incremental Treasury draws in the three scenarios. The remaining 

PSPA funding commitment remains unchanged at $258.1 billion. 

Cumulative senior preferred dividends includes dividends paid in 

4Q13 related to 3Q13 financial performance. 

Dollars in billions 

Source: FHFA 

Federal Housing Finance Agency Projections of the Enterprises’ Financial Performance 

April 2014 

3 
Federal Housing Finance Agency 

Background 

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This report provides updated information on 

possible ranges of future financial results of 

Fannie Mae and Freddie Mac (the “Enterprises”) 

under specified scenarios, using consistent economic conditions for both Enterprises. 

The Enterprises are required to conduct stress 

tests per FHFA rule 12 CFR § 1238 which implements section 165(i)(2) of the Dodd-Frank 

Wall Street Reform and Consumer Protection 

Act (the "Dodd-Frank Act"). Section 165(i)(2) of 

the Dodd-Frank Act requires certain financial 

companies with total consolidated assets of 

more than $10 billion, and which are regulated 

by a primary Federal financial regulatory agency, to conduct annual stress tests to determine 

whether the companies have the capital necessary to absorb losses as a result of adverse economic conditions. This year is the initial implementation of the Dodd-Frank Act Stress 

Tests. 

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In addition to stress tests required per the DoddFrank Act, this year as in previous years, FHFA 

worked with the Enterprises to develop forwardlooking financial projections across three possible house price paths (the “FHFA scenarios”). 

The Enterprises were required to conduct the 

FHFA scenarios as they have in the past, in 

conjunction with the initial implementation of the 

Dodd-Frank Act Stress Tests. Next year, the Enterprises will be required to conduct only the 

Dodd-Frank Act Stress Tests. 

FHFA published updated projections of the Enterprises’ financial performance under the FHFA 

Scenarios in October 2012, which can be found 

in FHFA’s Projections of the Enterprises’ Financial Performance, October 2012. The projections have been updated to reflect the current 

outlook for house prices and interest rates. 

Projections of the Enterprises’ Financial Performance 

April 2014 

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The projections reported here are not expected 

outcomes. They are modeled projections in response to “what if” exercises based on assumptions about Enterprise operations, loan performance, macroeconomic and financial market 

conditions, and house prices. The projections 

do not define the full range of possible outcomes. Actual outcomes may be very different. 

FHFA provided the Enterprises with key assumptions for each scenario. The key assumptions used for the Dodd-Frank Act Stress Tests 

(DFAST) and the FHFA Scenarios are described on page 5. The Enterprises used their 

respective internal models to project their financial results based on the assumptions provided 

by FHFA. 

 While this effort achieves a degree of comparability between the Enterprises, it does not eliminate differences in their respective internal models, accounting differences or management actions. 

4 
Federal Housing Finance Agency Projections of the Enterprises’ Financial Performance 

April 2014 

Scenario Assumptions 

Key assumptions for each of the scenarios discussed in this report are listed in Table 1. House price 

paths influence projections of credit expenses through the mark-to-market loan-to-value ratios of guaranteed mortgages, which impact the probabilities of default, projections of loss given default and loss 

severity. Assumptions about the prices of securities held in the retained portfolios affect mark-tomarket losses. Assumptions about growth of the retained portfolios and the credit guarantee books 

influence projections of revenue (net interest income and guarantee fee income, respectively.) The 

instantaneous default of the largest counterparty affects mark-to-market losses. 

Table 1: Scenario Assumptions 

Key Factors 

DFAST Severely 

Adverse Scenario FHFA Scenario 1 FHFA Scenario 2 FHFA Scenario 3 

Residential 

House prices 

- CoreLogic Index 

- Nine quarter 

decline of 25% 

- Moody’s “Stronger 

Near-term 

Rebound” 

- Case-Shiller 

National Index 

- Nine quarter 

increase of 13% 

- Moody’s “Baseline 

Forecast” 

- Case-Shiller 

National Index 

- Nine quarter 

increase of 12% 

- Moody’s “Second 

Recession” 

- Case-Shiller 

National Index 

- Decline through 

2014 of 4%; nine 

quarter decrease of 

2% 

Securities prices Non-agency prices 

fall by 20% to 90% 

at the start of the 

forecast horizon 

ABS and CMBS 

prices fall by 5% to 

10% at the start of 

the forecast horizon 

Same as FHFA 

Scenario 1 

Same as FHFA 

Scenario 1 

Credit Guarantee 

Book growth 

Management 

discretion 

Zero growth in 

credit guarantees 

through year end 

2016. 

Same as FHFA 

Scenario 1 

Same as FHFA 

Scenario 1 

Retained Portfolio 

growth 

Management 

discretion, but 

consistent with the 

terms of the 

PSPAs. 

The retained 

portfolios decline 

per the terms of the 

PSPAs. 

Same as FHFA 

Scenario 1 

Same as FHFA 

Scenario 1 

Counterparty 

Default 

Instantaneous 

default of the 

largest counterparty 

for Securities 

Financing 

Transactions and 

derivatives 

Management 

discretion 

Same as FHFA 

Scenario 1 

Same as FHFA 

Scenario 1 

5 
Federal Housing Finance Agency Projections of the Enterprises’ Financial Performance 

April 2014 

DFAST Severely Adverse Scenario Results 

As of September 30, 2013, the combined remaining funding commitment under the PSPAs was 

$258.1 billion. In the Severely Adverse scenario, incremental Treasury Draws range between $84.4 

billion and $190.0 billion depending on the treatment of deferred tax assets. The remaining funding 

commitment under the PSPAs is $173.7 billion without re-establishing valuation allowances on deferred tax assets. Assuming both Enterprises re-establish valuation allowances on deferred tax assets, the remaining funding commitment is $68.0 billion. 

Table 2: DFAST Severely Adverse Scenario Results 

 

 

 

 

 

 

Cumulative Projected Financial Metrics 

(Dollars in billions) (Q4 2013 - Q4 2015) 

Results without Impact of re- Results with 

re-establishing establishing re-establishing 

valuation valuation valuation 

allowance on allowance on allowance on 

deferred tax deferred tax deferred tax 

assets assets assets 

Pre-provision net revenue1 $47.0 $47.0 

(Provision) benefit for credit losses (110.7) (110.7) 

Mark-to-market gains (losses)2 (13.3) (13.3) 

Global market shock impact on trading securities

 and counterparty (9.8) (9.8) 

Net income before taxes (86.8) (86.8) 

(Provision) benefit for taxes 35.3 (105.5) (70.2) 

Other comprehensive income (loss)3 (38.8) (38.8) 

Total comprehensive income (loss) (90.3) (105.5) (195.8) 

Dividends paid - - -

PSPA funding commitment as of September 30, 2013 $258.1 $258.1
 

Treasury draws required 84.4 105.5 190.0
 

Remaining PSPA funding commitment $173.7 (105.5) $68.0 

Credit losses 4 $92.4 $92.4
 

Credit losses (% of average portfolio balance) 2.0% 2.0%
 

1 Includes net interest income, security impairments, operational risk losses, foreclosed property income (expense), and other noninterest income/expenses. 

2 Includes fair value gains (losses) on derivative and trading securities, and other gains (losses) on investment securities. 

3 Includes the global market shock impact on available-for-sale securities. 

4 Credit losses are defined as charge-offs, net plus foreclosed property expenses. 

Numbers may not foot due to rounding 

6 
 

Federal Housing Finance Agency Projections of the Enterprises’ Financial Performance 

April 2014 

FHFA Scenarios Results 

Under the three scenarios used in the projections, cumulative Treasury draws at the end of 2015 remain unchanged at $187.5 billion as neither Enterprise requires additional Treasury draws. The combined remaining commitment under the PSPAs is unchanged at $258.1 billion. 

In the three scenarios, the Enterprises pay additional senior preferred dividends to the US Treasury 

ranging between $54.0 billion in Scenario 1 to $36.3 billion in Scenario 3. 

Table 3: FHFA Scenarios Results 

Cumulative Projected Financial Metrics 

(Q4 2013 - Q4 2015) 

(Dollars in billions) Scenario 1 Scenario 2 Scenario 3 

Pre-provision net revenue1 $75.3 $74.8 $70.8 

(Provision) benefit for credit losses 2.2 (0.5) (20.4) 

Mark-to-market gains (losses)2 (2.1) (2.1) (2.1) 

Net income before taxes 75.4 72.3 48.3 

(Provision) benefit for taxes (22.0) (20.9) (12.5) 

Other comprehensive income3 (3.1) (3.1) (3.1) 

Total comprehensive income 50.4 48.3 32.7 

Dividends paid (54.0) (51.9) (36.3) 

Treasury draws required - - -

Remaining PSPA funding commitment $258.1 $258.1 $258.1 

1 Includes net interest income, security impairments, foreclosed property income (expense), and other non-interest income/expenses.
 

2 Includes fair value gains (losses) on derivative and trading securities, and other gains (losses) on investment securities.
 

3 Includes fair value gains (losses) on available-for-sale securities.
 

7 
Federal Housing Finance Agency Projections of the Enterprises’ Financial Performance 

April 2014 

DFAST Severely Adverse Scenario Results versus FHFA 

Scenario 3 Results 

A number of assumptions contribute to higher losses in the DFAST Severely Adverse scenario compared to FHFA Scenario 3. First, the house price path in the DFAST Severely Adverse scenario is significantly more pessimistic than in FHFA Scenario 3. Furthermore the decline in value of non-agency 

securities is substantially higher in the DFAST Severely Adverse scenario. In addition, the DFAST Severely Adverse scenario includes the effect of the default of a large counterparty, which the FHFA scenario does not include. 

Table 4: DFAST Severely Adverse Scenario Results versus FHFA Scenario Results 

 

 

 

 

 

 

Cumulative Projected
 

Financial Metrics
 

(Q4 2013 - Q4 2015)
 

DFAST
 

Severely FHFA
 

(Dollars in billions) Adverse Scenario 3
 

Pre-provision net revenue1 $47.0 $70.8 

(Provision) benefit for credit losses 

Mark-to-market gains (losses)2 

Global market shock impact on trading securities

 and counterparty 

Net income before taxes 

(110.7) 

(13.3) 

(9.8)

(86.8) 

(20.4) 

(2.1) 

-

48.3 

(Provision) benefit for taxes 

Other comprehensive income3 

35.3 

(38.8) 

(12.5) 

(3.1) 

Total comprehensive income 

Dividends paid 

(90.3) 

-

32.7 

(36.3) 

PSPA funding commitment as of September 30, 2013 258.1 258.1 

Treasury draws required 84.4 -

Remaining PSPA funding commitment $173.7 $258.1 

Assuming re-establishing a valuation allowance on 

deferred tax assets 

PSPA funding commitment as of September 30, 2013 

Treasury draws required 

258.1 

190.0 

Remaining PSPA funding commitment $68.0 

1 Includes net interest income, security impairments, foreclosed property income (expense), and other non-interest income/expenses.
 

2 Includes fair value gains (losses) on derivative and trading securities, and other gains (losses) on investment securities.
 

3 Includes fair value gains (losses) on available-for-sale securities.
 

8 
  

Federal Housing Finance Agency Projections of the Enterprises’ Financial Performance 

April 2014 

Comparison of House Price Paths 

House price changes have been the major driver of credit losses at the Enterprises. A wide range of 

possible future paths exist for house prices at the national and local levels. Given the high level of uncertainty about overall economic conditions in general and the U.S. housing markets in particular, 

FHFA directed the Enterprises to project financial results for Moody’s current baseline and two additional house price paths. Moody’s considers “Second Recession” to be a downside alternative to the 

Current Baseline and “Stronger Near-term Rebound” to be an upside alternative to the Current Baseline. The house price path in the DFAST Severely Adverse scenario is significantly more pessimistic 

than that in any of the three FHFA scenarios. 

Figure 1: Comparison of House Price Paths 

130 

FHFA Scenario 1
 

Moodys Stronger Near-term Rebound 

120 

110 

100 

90 

80 

70 

2Q13 4Q13 4Q14 4Q15 4Q16 4Q17 

FHFA Scenario 3 

Moodys Second Recession 

FHFA Scenario 2 

Moodys Current Baseline 

end of 

projection

period 

2Q13 = 100 

DFAST 

Severely Adverse Scenario 

Source: FHFA 

9 
Federal Housing Finance Agency Projections of the Enterprises’ Financial Performance 

April 2014 

FHFA Scenario Results Over Time 

FHFA has published annual projections of the Enterprises’ financial results (the “FHFA Scenarios”) 

since October 2010. As illustrated in Figure 2, the projected financial results have improved each year 

driven by these key factors. First, the Enterprises’ single-family portfolio quality has improved over 

time reducing the exposure to single-family credit. As illustrated in Figure 3, the Enterprises’ singlefamily credit guarantee portfolios now have substantially fewer delinquent loans, less exposure to vintages with non-traditional products, and higher equity than the portfolios in 2010. 

Figure 2: The Enterprises’ Projected Treasury Cumulative Draws under FHFA Scenario 3 

(Dollars in billions) FHFA Scenario 3 

Report Date Oct 2010 Oct 2011 Oct 2012 Apr 2014 

Portfolio Date Jun 2010 Jun 2011 Jun 2012 Sep 2013 

Starting Treasury Draw $148 $169 $187 $187 

Incremental Treasury Draw 215 142 22 0 

Projected Cumulative Treasury Draw $363 $311 $209 $187 

Figure 3: The Enterprises’ Single-Family Credit Guarantee Portfolio Quality over time 

Total Delinquent Loan Count 

(in thousands) 

Seriously Delinquent Loan Count 

(in thousands) 

Seriously Delinquent Loan Rate 

(in percent) 

Mark-to-Market Loan to Value Ratio 

Greater Than 100% 

(% of Book) 

Average Mark-to-Market Loan to Value Ratio 

(in percent) 

2005 - 2008 Vintages 

(% of Book) 

Source: FHFA 

June June June September 

2010 2011 2012 2013 

2,323 1,728 1,334 

1,964 

1,394 1,146 1,009 

724 

4.57% 3.85% 3.50% 2.56% 

14% 18% 17%

9% 

74% 78% 77% 68% 

44% 34% 27% 

16% 

10 
Federal Housing Finance Agency Projections of the Enterprises’ Financial Performance 

April 2014 

FHFA Scenario Results Over Time (continued) 

The second contributing factor to improving projections of financial results since 2010 is the house 

price path assumptions used in the projections. As illustrated in Figure 4, the most severe projected 

house price path has become less pessimistic over time as the housing market recovers. Furthermore, the actual house price path has been much better than the most severe projected path as illustrated in Figure 5. Going forward, the FHFA Scenarios will be replaced by the Dodd-Frank Act Stress 

Tests. 

Figure 4: FHFA Scenario 3 House Price Paths Over Time 

FHFA Scenario 3 House Price Paths 

Moodys S3 (Deeper Second Recession; Case-Shiller National Index) 

80 

90 

100 

110 

October 2012 

April 2014 

October 2011 

Start = 100 

October 2010 

70
 

Source: FHFA 

Figure 5: FHFA House Price Path vs. Actual House Prices 

11 

Actual House Prices vs. Oct 2010 FHFA Scenario 3 

(Case-Shiller National Index) 110 

80 

90 

100 Actual House Prices 

2Q10 = 100 

FHFA Scenario 3 

October 2010 

70
 

Source: FHFA 
Federal Housing Finance Agency Projections of the Enterprises’ Financial Performance 

April 2014 

Appendix 

12 
 

 

 

 

 

 

 

 

 

 

 

Cumulative Projected Financial Metrics 

(Dollars in billions) 

Results without 

re-establishing 

valuation 

allowance on 

deferred tax 

(Q4 2013 - Q4 2015) 

Impact of reestablishing 

valuation 

allowance on 

deferred tax 

Results with 

re-establishing 

valuation 

allowance on 

deferred tax 

assets assets assets 

Pre-provision net revenue1 

(Provision) benefit for credit losses 

Mark-to-market gains (losses)2 

Global market shock impact on trading securities

 and counterparty 

Net income before taxes 

(Provision) benefit for taxes 

Other comprehensive income (loss)3 

Total comprehensive income (loss) 

Dividends paid 

$31.0 

(53.3) 

(11.1) 

(6.8) 

(40.2) 

16.4 

(13.6) 

(37.4) 

-

(62.7) 

(62.7) 

-

$31.0 

(53.3) 

(11.1) 

(6.8) 

(40.2) 

(46.3) 

(13.6) 

(100.2) 

-

PSPA funding commitment as of September 30, 2013 

Treasury draws required 

Remaining PSPA funding commitment 

$117.6 

34.4 

$83.1 

62.7 

(62.7) 

$117.6 

97.2 

$20.4 

Credit losses 4 $55.9 $55.9 

Credit losses (% of average portfolio balance) 1.9% 1.9% 

1 Includes net interest income, security impairments, operational risk losses, foreclosed property income (expense), and other noninterest income/expenses. 

2 Includes fair value gains (losses) on derivative and trading securities, and other gains (losses) on investment securities. 

3 Includes the global market shock impact on available-for-sale securities. 

4 Credit losses are defined as charge-offs, net plus foreclosed property expenses. 

Numbers may not foot due to rounding 

Federal Housing Finance Agency Projections of the Enterprises’ Financial Performance 

April 2014 

DFAST Severely Adverse Scenario Results – Fannie Mae 

13 
 

 

 

 

 

 

 

Cumulative Projected Financial Metrics 

(Dollars in billions) 

Results without 

re-establishing 

valuation 

allowance on 

deferred tax 

(Q4 2013 - Q4 2015) 

Impact of reestablishing 

valuation 

allowance on 

deferred tax 

Results with 

re-establishing 

valuation 

allowance on 

deferred tax 

assets assets assets 

Pre-provision net revenue1 

(Provision) benefit for credit losses 

Mark-to-market gains (losses)2 

Global market shock impact on trading securities

 and counterparty 

Net income before taxes 

(Provision) benefit for taxes 

Other comprehensive income (loss)3 

Total comprehensive income (loss) 

Dividends paid 

$16.0 

(57.4) 

(2.2) 

(3.0) 

(46.6) 

18.9 

(25.2) 

(52.9) 

-

(42.8) 

(42.8) 

-

$16.0 

(57.4) 

(2.2) 

(3.0) 

(46.6) 

(23.9) 

(25.2) 

(95.8) 

-

PSPA funding commitment as of September 30, 2013 

Treasury draws required 

Remaining PSPA funding commitment 

$140.5 

49.9 

$90.6 

42.8 

(42.8) 

$140.5 

92.8 

$47.7 

Credit losses 4 $36.5 $36.5 

Credit losses (% of average portfolio balance) 2.0% 2.0% 

1 Includes net interest income, security impairments, operational risk losses, foreclosed property income (expense), and other noninterest income/expenses. 

2 Includes fair value gains (losses) on derivative and trading securities, and other gains (losses) on investment securities. 

3 Includes the global market shock impact on available-for-sale securities. 

4 Credit losses are defined as charge-offs, net plus foreclosed property expenses. 

Numbers may not foot due to rounding 

Federal Housing Finance Agency Projections of the Enterprises’ Financial Performance 

April 2014 

DFAST Severely Adverse Scenario Results – Freddie Mac 

14 
 

 

 Cumulative Projected Financial Metrics 

Fannie Mae (Q4 2013 - Q4 2015) 

(Dollars in billions) Scenario 1 Scenario 2 Scenario 3 

Pre-provision net revenue1 $46.2 $45.7 $43.0 

(Provision) benefit for credit losses 6.1 4.6 (6.0) 

Mark-to-market gains (losses)2 (0.3) (0.3) (0.3) 

Net income before taxes 51.9 50.0 36.6 

(Provision) benefit for taxes (16.3) (15.7) (11.0) 

Other comprehensive income3 (1.3) (1.3) (1.3) 

Total comprehensive income 34.3 32.9 24.3 

Dividends paid (36.1) (34.7) (26.1) 

Treasury draws required - - -

Remaining PSPA funding commitment $117.6 $117.6 $117.6 

 

 

 Cumulative Projected Financial Metrics 

Freddie Mac (Q4 2013 - Q4 2015)

(Dollars in billions) Scenario 1 Scenario 2 Scenario 3 

Pre-provision net revenue1 $29.1 $29.2 $27.8 

(Provision) benefit for credit losses (3.9) (5.1) (14.4) 

Mark-to-market gains (losses)2 (1.7) (1.7) (1.7) 

Net income before taxes 23.5 22.3 11.7 

(Provision) benefit for taxes (5.6) (5.2) (1.5) 

Other comprehensive income3 (1.7) (1.7) (1.7) 

Total comprehensive income 16.1 15.4 8.5 

Dividends paid (17.9) (17.2) (10.3) 

Treasury draws required - - -

Remaining PSPA funding commitment $140.5 $140.5 $140.5 

1 Includes net interest income, security impairments, foreclosed property income (expense), and other 

non-interest income/expenses. 

2 Includes fair value gains (losses) on derivative and trading securities, and other gains (losses) on investment 

securities. 

3 Includes fair value gains (losses) on available-for-sale securities.

Federal Housing Finance Agency Projections of the Enterprises’ Financial Performance 

April 2014 

FHFA Scenarios Results 

 15