The Federal Housing Finance Agency (FHFA) recently released the results of the 2020 and 2021 annual stress tests Fannie Mae and Freddie Mac are required to conduct under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
The Dodd-Frank Act, amended in 2019, requires certain financial institutions regulated by a federal financial regulatory agency (with more than $250 billion in assets) to conduct annual stress tests to determine whether they can absorb losses as a result of severely adverse economic conditions. The report, Dodd-Frank Act Stress Tests – Severely Adverse Scenario, provides updated information on possible ranges of future financial results of the enterprises under severely adverse economic conditions.
Key findings:
– Both enterprises reported comprehensive income in the severely adverse scenario.
Key drivers were portfolio growth and strong house price appreciation in 2020 and a
less severe house price decline in the 2021 planning horizon.
– The provision for credit losses was the largest expense at both enterprises.
– The second largest expense at both enterprises was the global market shock impact,
including the counterparty default scenario component.
Source: FHFA
