​​​​​​​Revised 8/2/2023

​​​​​Overview

• Fannie Mae and Freddie Mac (the “Enterprises”) are required to conduct annual stress tests pursuant to Federal Housing Finance Agency (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 that have total consolidated assets of more than $10 billion and 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 is the fifth implementation of the Dodd-Frank Act Stress Tests (DFAST) for the Enterprises.
  
• In September 2008, FHFA suspended capital requirements after placing Fannie Mae and Freddie Mac into conservatorships. The Senior Preferred Stock Purchase Agreements that were established between the Department of the Treasury and each Enterprise limit the amount of capital that each Enterprise can hold to a Capital Reserve Amount. Currently the Capital Reserve Amount is $3 billion.
  
• Notwithstanding the capital limits stipulated in the Senior Preferred Stock Purchase Agreements, FHFA requires the Enterprises to conduct DFAST annually in order to provide insight into risk exposure and potential sources of losses in the prescribed conditions. This report provides updated information on possible ranges of future financial results of the Enterprises under severely adverse conditions. The severely adverse conditions assumed are identical for both Enterprises.
  
• 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 different.
  
• In prior years, the Enterprises applied a standard effective tax rate of 35 percent, consistent with the prevailing corporate tax rate. For the 2018 DFAST reporting cycle the standard effective tax rate was lowered to 21 percent, consistent with the current corporate tax rate under the Tax Cuts and Jobs Act signed into law on December 22, 2017.
  
• The DFAST Severely Adverse scenario is described on page 4. The Enterprises used their respective internal models to project their financial results based on the assumptions provided by FHFA. While this results in a degree of comparability between the Enterprises, it does not eliminate differences in the Enterprises’ respective internal models, accounting differences, or management actions.
  

Summary of Severely Adverse Scenario Results​

• The Enterprises had drawn a combined $191.4 billion from the Department of the Treasury under the terms of the Senior Preferred Stock Purchase Agreements (PSPAs), after receiving funds to eliminate the net worth deficits as of December 31, 2017. The combined remaining funding commitment under the PSPAs was $254.1 billion. In the Severely Adverse scenario incremental Treasury draws are projected to range between $42.1 billion and $77.6 billion, depending on the treatment of deferred tax assets. The remaining funding commitment under the PSPAs after these projected draws would be $212.0 billion without establishing valuation allowances on deferred tax assets, or $176.5 billion if both Enterprises established valuation allowances on deferred tax assets.
  
• Important contributors to losses in the Severely Adverse Scenario included the following:
  
• The provision for credit losses was the largest contributor to comprehensive losses at both Enterprises.
• The second largest contributor to comprehensive losses at both Enterprises was the global market shock impact on trading securities and available-for-sale securities.
• Comprehensive losses increased in the 2018 DFAST reporting cycle compared to the 2017 DFAST reporting cycle, mostly driven by the increase in provision for cre​dit losses as a result of the more severe decline in home prices included in the 2018 DFAST Severely Adverse scenario.

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