2019 Dodd-Frank Act Stress Test 

Severely Adverse Scenario Results

August 15, 2019
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Executive Summary

▪ Freddie Mac’s statutory mission is to provide liquidity, stability and affordability to the U.S. housing market. Consistent with 

its charter, the company’s business is focused exclusively on the U.S. residential mortgage market. 

▪ The company has been operating under conservatorship since September 6, 2008 under the direction of the Federal 

Housing Finance Agency (FHFA), as Conservator. Freddie Mac’s ability to access funds from Treasury under the Senior 

Preferred Stock Purchase Agreement (PSPA) is critical to keeping the company solvent. 

▪ Freddie Mac is required to conduct annual stress tests to assess capital adequacy under FHFA’s rule implementing the 

Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) stress testing requirements. The 2019 DoddFrank Act Stress Test (DFAST) represents the sixth year that Freddie Mac is performing the stress test.

▪ FHFA’s stress test specifications include four required scenarios (including Severely Adverse with and without a valuation 

allowance against our Deferred Tax Assets), each reflecting projections over a nine-quarter horizon (1Q19 - 1Q21). The 

Severely Adverse scenario includes a 26% decline in house prices, 35% drop in commercial real estate prices and a severe 

global market shock.

▪ Results are not expected outcomes. They are modeled projections based on hypothetical economic conditions. Actual 

outcomes may be very different.
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Stress Test Overview

Background

▪ Dodd-Frank requires certain financial companies with more than $10 billion in assets that are regulated by a primary federal 

financial regulatory agency to perform annual stress tests to assess capital adequacy

▪ For the GSEs, the FHFA-prescribed stress test assesses capital adequacy through the sufficiency of the remaining funding 

commitment under the PSPA(1)

▪ FHFA provided the key scenario assumptions for the 2019 Dodd-Frank annual stress test in March 2019. The nine quarter 

planning horizon includes 1Q19 to 1Q21, beginning with the 12/31/2018 balance sheet information

▪ The 2019 stress test results were submitted to FHFA and the Federal Reserve (sent by FHFA) on May 17, 2019

▪ Overall stress test results were reviewed by Freddie Mac’s Board of Directors, Chief Executive Officer, Chief Financial 

Officer, Chief Enterprise Risk Officer, and other key stakeholders

Key Economic Variables for the Severely Adverse Scenario as prescribed by FHFA

Macroeconomic Variables 2019 DFAST 2018 DFAST

➢ Residential House Prices (9-Quarter Decline) -26% -30%

➢ Commercial Real Estate (9-Quarter Decline) -35% -40%

➢ Real Gross Domestic Product (peak-to-trough) -7.8% -7.3%

➢ Unemployment Rate (Peak) 10% 10%

Interest-Rate Variables

➢ 30-yr Mortgage Rate (Peak) 4.5% 6.0%

➢ 10-yr Treasury Rate (Ending) 1.5% 2.4%

➢ Short-term Rate (Ending) 0.13% 0.1%

Global Market Shock

➢ Instantaneous Price Shocks on Non-agency securities RMBS: up to -83%; RMBS: up to -69%

CMBS up to -78% CMBS up to -20%

➢ Option-Adjusted-Spread (OAS) Shocks MBS OAS: + 50bps MBS OAS: +192bps 

(1) Including $3.0 billion permitted capital reserve at January 1, 2019.
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Severely Adverse Scenario Results

Stress test results are not expected outcomes. They are modeled projections based on

hypothetical economic conditions prescribed by FHFA. Actual outcomes may be very different.

 Impact of establishing 

valuation allowance on 

deferred tax assets 

 Billions of dollars 

Percent of average 

assets6

 Billions of dollars 

Percent of average 

assets6

 1 Pre-provision net revenue1

 13.4 0.64% 13.4 0.64%

 2 (Provision) benefit for credit losses (16.5) (16.5)

 3 Mark-to-market gains (losses)2

 (2.1) (2.1)

 4 Global market shock impact on trading securities (3.5) (3.5)

and counterparty

 5 Net income before taxes (8.8) -0.42% (8.8) -0.42%

 6 (Provision) benefit for taxes 1.8 (8.8) (6.9)

 7 Other comprehensive income (loss)3

 (1.5) (1.5)

 8 Total comprehensive income (loss)

 (8.4) -0.40% (8.8) (17.2) -0.83%

 9 Credit losses4

 (5.6) (5.6)

1 0 Credit losses (% of average portfolio balance)5

0.26% 0.26%

1

 Includes net interest income, security impairments, operational risk losses, 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 global market shock impact on available-for-sale securities.

4

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

5

 Average portfolio balance over the nine-quarter planning horizon.

6

 Average total assets over the nine-quarter planning horizon. 

Cumulative Projected Financial Metrics

(Q1 2019 - Q1 2021)

 Results without

establishing valuation allowance on 

deferred tax assets 

 Results with

establishing valuation allowance on 

deferred tax assets 
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Appendix:

Stress Test Assumptions 

and Methodologies
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Stress Test Components

Pre-Provision Net 

Revenue (PPNR)

Net interest income, security impairments, operational risk losses, foreclosed property 

income (expense), and other non-interest income (expense)

Loan Loss Provision

Credit loss provision expenses related to estimated single-family (SF) credit losses, 

troubled debt restructurings (TDRs), potential losses from recovering less than 100% of the 

company’s exposure to mortgage insurer (MI) counterparties, and multifamily (MF) credit 

provisions 

Mark-to-Market

Gains (Losses)

Mark-to-market gains (losses) related to changes in fair value of derivatives and trading 

securities, and other gain (losses) on investment securities not included in global market 

shock

Global Market Shock

(net of tax)

Instantaneous global shocks of interest rates, volatility, agency MBS OAS, and non-agency 

MBS prices applied to trading and AFS securities, and the estimated impact of a default of 

the company’s largest capital markets counterparty. Includes tax benefit on AFS securities 

that the company intends to hold to recovery
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Description

▪ PPNR reflects business revenues and expenses prior to major stress loss

components.

▪ Includes projections of net interest income, non-interest income, and non-interest expense for the existing book of 

business and new business during the nine-quarter horizon.

▪ Material risks covered include interest-rate risk, credit risk for non-agency MBS, and operational risk.

Methodologies 

▪ Uses internal business assumptions for business volume, retained portfolio size, guarantee fees, risk-sharing 

transactions, debt funding mix, and spreads to LIBOR for assets and debt. 

▪ Projects cash flows using a third-party model, incorporating internal business assumptions and FHFA-provided 

scenario interest-rate paths. 

▪ Estimates forward prices on trading and AFS securities using third-party model for non-agency MBS, and internal 

model for agency MBS.

Pre-Provision Net Revenue (PPNR)
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Description

▪ Reflects credit loss provision expenses related to estimated SF credit losses, TDRs, potential losses from recovering less 

than 100% of the company’s exposure to MI counterparties, and MF credit provisions.

▪ Captures mortgage credit risk.

Methodologies 

▪ Estimates SF provision expenses using Freddie Mac’s internal models, enhanced credit loss forecasting methodology and 

key house-price and interest-rate inputs provided by FHFA. 

▪ Incorporates estimated impacts of other relevant FHFA-provided macroeconomic variables, such as unemployment rate 

and GDP decline. 

▪ SF loss projections also reflect haircuts to MI payment obligations and the assumption that current loan modification 

programs will continue. 

▪ Estimates MF loan loss provision using regression of material macroeconomic variables provided by FHFA

(unemployment, 3-month Treasury yield, commercial real estate price index) versus Freddie Mac’s historical loan loss 

reserves.

Loan Loss Provision (LLP)
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Other Components

Mark-to-Market Gains (Losses) (MTM)

Global Market Shock (GMS)

Description

▪ Reflects mark-to-market gains (losses) from changes in fair value of derivatives and MF held-for sale loans

due to changes in interest rates. 

▪ Material risk covered includes interest rate risk.

▪ We consider hedge accounting in our results.

Methodologies ▪ Applies FHFA-specified interest rate shocks to estimated changes in fair value of derivatives.

Description

▪ The GMS is an instantaneous shock on Freddie Mac’s assets and debt valued at fair value in the first quarter that is not 

recovered during the nine-quarter forecast horizon. This shock is treated as an add-on that is exogenous to the 

macroeconomic and financial market environment specified in the stress test scenario. 

▪ The GMS captures market risks related to changes in interest rates, volatility, agency MBS OAS, as well as price shocks to 

non-agency MBS. 

Methodologies 

▪ Applies FHFA-specified shocks for interest rates, volatility, agency MBS OAS, and non-agency price shocks to the 

company’s MBS holdings. 

▪ Includes tax effect on AFS securities that the company has both the intent and ability to hold to recovery.

▪ Estimated impact of default of largest counterparty in the stress test. Assumes instantaneous default in the first quarter of 

the planning horizon with zero recovery. 
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Description of Key Drivers

Mortgage 

Credit Risk

▪ Mortgage credit risk is the risk that a borrower fails to make timely payments on a mortgage owned or guaranteed by Freddie Mac.

▪ SF credit risk varies significantly by book year. Since 2008, Freddie Mac has enhanced its credit and underwriting policies and

purchased fewer loans with higher risk characteristics, which has contributed to improvements in the credit quality of the SF

guarantee business. 

▪ MF credit risk is substantially reduced as a result of the K-deal securitization program, where Freddie Mac guarantees only the 

most senior tranches of K-deals, resulting in a significant portion of credit risk being transferred to the investors in subordinated 

tranches. 

Market Risk 

including 

Interest Rate 

and Spread 

Risk

▪ Freddie Mac’s GAAP financials are exposed to interest-rate risk. 

▪ The retained portfolio is exposed to spread risk related to adverse changes in the spread between security prices in related market 

sectors. 

Counterparty

Credit Risk

▪ Counterparty credit risk is the risk that a counterparty will fail to meet its contractual obligations to Freddie Mac. The company’s 

counterparty credit exposures include, but are not limited to, single-family seller/servicers that sell mortgage loans to the company 

and service the loans, mortgage insurers (MIs), and counterparties to derivative and repurchase agreement transactions. 

Operational

Risk

▪ Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people, systems, or from 

external events. Operational risk is inherent in the company’s business activities and can manifest itself in various ways, including 

accounting or operational errors, business interruptions, fraud and technology failures.