Mortgage giant credits strong underwriting and prudent risk reduction practices
Fannie Mae’s projected performance in the scenario of a severe global recession has improved significantly in this year’s stress test.
The test, as required under the Dodd-Frank Act, examined how the GSEs would perform in a severely adverse scenario. That scenario is largely based on the Great Recession.
Under the test’s hypothetical stress scenario, the government-sponsored enterprise would see a net income of $10.2 billion in 2021, driven by solid portfolio growth and strong house price appreciation the previous year.
“Fannie Mae’s strong underwriting and prudent risk reduction practices have resulted in declines in risk exposures and hypothetical stress losses while allowing the company to maintain its mission to provide liquidity in all US markets and in all economic cycles,” the GSE said in its release.
In the FHFA’s 2021 scenario, GDP would fall by 4%, unemployment would increase 6.7%, and consumer price inflation would drop to about 1%. As a result of the severe decline in economic activity and low inflation levels, the 10-year Treasury immediately falls to a trough of about 0.25%.
In addition, home prices would decline by about 23.5% nationally, and commercial real estate prices would fall by 35%. The home price decline is slightly less severe, while the commercial real estate price decline was unchanged relative to the 2020 stress test, according to Fannie.