Report: Fannie, Freddie would still need bailout in a new recession

by Ryan Smith01 May 2015
Fannie Mae and Freddie Mac may have paid the government back for propping them during the financial crisis, but a recent stress test shows the mortgage finance giants would still need a bailout in the event of another meltdown.

Fannie and Freddie would need a bailout of as much as $157.3 billion to stay afloat if home prices took another nosedive, according to the results of a recent stress test conducted by the Federal Housing Finance Agency, Bloomberg reported. The test, which is mandated by the Dodd-Frank Act, uses the same criteria the Federal Reserve does when testing big banks’ abilities to withstand recession.

Fannie and Freddie would need another bailout largely because of the terms of their original 2008 bailout, Bloomberg reported. In that arrangement, the companies received $187.5 billion from the federal government. In return, they send all quarterly profits, above a minimum net worth threshold, to the Treasury. That means Fannie and Freddie have been unable to build up a capital cushion that might shield them in the event of another meltdown.

According to Bloomberg, if the unemployment rate were to hit 10% in 2016 and the economy were to contract by 4.5%, the companies would need between $68.6 billion and $157.3 billion to stay viable. They are authorized to draw as much as $258.1 billion from the Treasury if circumstances demand it.