Three different scenarios for predicting the level of
additional financial support the two government sponsored enterprises (GSEs)
Freddie Mac and Fannie Mae may require from the U.S. Treasury were presented today
by their conservator the Federal Housing Finance Agency (FHFA). The scenarios updated similar projections
originally released in October 2010 and updated one year later.
FHFA said its projections are not
expected outcomes but modeled projections in response to "what if" exercises
based on assumptions about GSE operations, loan
performance, macroeconomic and financial market conditions, and house prices.
do the projections define the
full range of possible outcomes. FHFA defines the effort as "a sensitivity analysis of
future financial results
to possible house price paths."
scenarios make the following assumptions:
interest rates are implied by the forward curves as of June 30, 2012.
Based Securities and Commercial Mortgage Backed Security prices fall by 5
points at the beginning of the period.
MBS spread to swaps remain unchanged.
size of the retained portfolios are in accordance with the terms of the Senior
Preferred Stock Purchase Agreements (PSPAs) in force between the GSEs and
Treasury and additions to the retained portfolios are limited to nonperforming
loans bought out of pools backing the GSEs MBS and PCs.
in the three scenarios is in the Moody's price paths each employs. Scenario 1
uses Moody's "Stronger Near-term Rebound" house price paths; Scenario two uses
the "Current Baseline" price paths, and the third scenario is based on Moody's
"Deeper Second Recession" house price paths.
Since the last
FHFA projections each of the assumptions have been updated to reflect the
current outlook for house prices, interest rates, trends in borrower behavior
and amendments to the PSPAs. The
projection period has been extended an additional year to 2015.
To date the GSEs
have drawn $187.5 billion from the Treasury.
The additional draws needed to carry the GSEs through to the end of 2015
under the three scenarios would put the cumulative totals into a range from
$191 billion to $209 billion including the money drawn in order to cover the
dividends the GSEs are required to pay back to the Treasury. However, if dividends and the draws necessary
to support them were removed from the projections the cumulative draws would
then range from $67 billion to $138 billion.
projections the required draws through to the end of 2014 were $220 billion to
$311 billion. Changes to the
PSPAs, effective January 1,
2013 replaced a fixed 10 percent
dividend on senior preferred stock with a sweep of
net worth and effectively ends the contribution of dividends to projected Treasury draws.
For the selected
scenarios in the current projections
$22 billion would be
required to support the Enterprises over the projection period. Freddie
Mac would not require
additional Treasury draws after
2012 in any of the
three scenarios. Fannie Mae would
not require additional Treasury
draws after 2012 in
three scenarios. Furthermore, over the projection period the Enterprises pay additional dividends
billion in Scenario 1 to $32 billion in Scenario 3.
The current projections differ
from those one year ago in several ways.
They both cover a period of three and a half years but the current ones are
extended out through the end of 2015. In
addition to covering a different time period, there has been the change to the
dividend structure of the PSPA mentioned above.
Other factors contributed to lower
projected Treasury draws in the current projections. First, the projected
provision for credit losses for
all three scenarios is lower
than in the previous projection due to
improvements in projected house
price paths and in the
number of delinquent
loans at the start of
the projection period.
The actual house
path over the past year
was more positive than the
house price paths used in
the Baseline (Scenario 2)
and Deeper Second Recession (Scenario 3) house price
paths in the previous projections
and in most cases Moody's price paths are more objective than in previous
projections, and recent observed
trends indicate higher REO sales prices
than previously projected.