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. Nor 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."
All three scenarios make the following assumptions:
- Future interest rates are implied by the forward curves as of June 30, 2012.
- Asset Based Securities and Commercial Mortgage Backed Security prices fall by 5 points at the beginning of the period.
- Agency MBS spread to swaps remain unchanged.
- The 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.
The difference 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.
In 2011's 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 an additional $3 to $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 two of the three scenarios. Furthermore, over the projection period the Enterprises pay additional dividends of $78 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 in the current projection 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 price 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.
