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Why Fannie and Freddie’s failed stress test proves nothing

The Hill

May 22, 2014, by Ike brannon

A stress test analysis of the solvency of Fannie Mae and Freddie Mac, the Government-Sponsored Entities (or GSEs) charged with providing liquidity to the mortgage market to boost home ownership, showed that neither has enough capital to withstand another severe financial blow of the sort that occurred during the 2008 financial crisis.

The results of this exercise suggest that a recurrence would cost the Treasury roughly the same amount of money as it put into the GSEs after the last crisis, which is somewhere in the vicinity of $190 billion.

Treasury officials—such as Michael Stegman, the department’s counselor for housing finance, suggested that these results buttress Treasury’s 2012 decision to sweep the entire net worth of the two entities into their coffers each quarter: The argument is that if Treasury is the backstop of two entities that apparently need one, it’s only right that they—and not any of the other shareholders—get paid for assuming that risk.

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