In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, Freddie Mac has released its 2023 Stress Test Disclosure, which reflects two hypothetical economic scenarios, including a “severely adverse” scenario. Under the latter, Freddie Mac would face a credit loss of $13.7 billion — or 0.4% of its total portfolio — under the adverse scenario.
Losses under the 2023 scenario are higher when compared to the results of the 2022 test. Last year, the GSE was projected to face a credit loss of only 6.3%, or 0.19% of its average portfolio balance.
Fannie Mae has not yet released the results of its 2023 Dodd-Frank Act Stress Test (DFAST). In June of this year, that GSE was forced to re-release the results of its 2022 test after it had made an “identification of errors in an underlying model.” This led the GSE to advise against “rely[ing] on the information in [the] report for any purpose.”
Freddie Mac is required to conduct annual stress tests in an effort to “assess capital adequacy under [the Federal Housing Finance Agency (FHFA)’s] rule implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) stress testing requirements,” the results explained.
The annual tests are designed to determine capital adequacy, and summarizes results based on a “severely adverse” scenario prescribed by FHFA based on a hypothetical scenario that illustrates the resiliency of the model to challenging economic conditions.
This year’s adverse scenario requires a 38% decline in home prices, a 40% reduction in commercial real estate prices, and a severe global market shock with the GSE’s largest counterparty defaulting.
The GSE is also required to disclose “certain capital information, such as net worth, and available common equity tier 1 (CET1) calculated in accordance with requirements of the FHFA Enterprise Regulatory Capital Framework (ERCF) Rule,” a requirement which began with the publication of 2022’s results.
“Results are not expected outcomes,” Freddie Mac said. “They are modeled projections based on hypothetical economic conditions. Actual outcomes may be very different.”
Once Freddie Mac releases its 2023 DFAST, FHFA is expected to compile a report featuring both sets of results.
Earlier this month, Freddie Mac reported that it had generated $2.94 billion in net income in the second quarter, up 41% from the first quarter and 20% year-over-year.