FHFA Notifies GSEs About Required Stress Testing

The Federal Housing Finance Agency (FHFA) sent a Notice to the Federal Register concerning Orders issued to Fannie Mae, Freddie Mac and the twelve Federal Home Loan Banks (the regulated entities) requiring reporting of annual stress testing results. The Orders, which include the stress test scenarios, were issued on November 26, 2013 under FHFA’s final stress testing rule. The stress tests, required by the Dodd-Frank Act, are designed to determine whether the regulated entities have the capital necessary to absorb losses as a result of adverse economic conditions. FHFA also issued Summary Instructions and Guidance including revised templates the regulated entities will use to report the results of the testing. The Dodd-Frank Act requires the tests annually for financial companies that have total consolidated assets of $10 billion or more and are regulated by a primary federal financial regulatory agency. The regulated entities are required to submit the results of stress tests based on three scenarios: Baseline, Adverse, and Severely Adverse. Assumptions for the variables in each separate scenario differ, and the regulated entities are expected to use those variables that are relevant to their individual lines of business. Fannie Mae and Freddie Mac are required to publish their results by April 30, 2014. The Federal Home Loan Banks must publish their results by July 30, 2014. For this year, Fannie Mae and Freddie Mac are also required to conduct additional FHFA-required stress tests, as they have in the past, in conjunction with the initial implementation of the Dodd-Frank Act stress tests. FHFA expects to release those results along with a comparison to the results of the Dodd-Frank Act stress tests in the second quarter of 2014. Going forward, the Dodd-Frank Act stress tests will replace the financial projections of Fannie Mae and Freddie Mac that FHFA has released in the past.