Banking and Finance Law Daily Wrap Up, GOVERNMENT SPONSORED ENTERPRISES—FHFA orders stress tests for Fannie, Freddie, (Mar 5, 2025)

By Donielle Tigay Stutland, J.D.

The Enterprises must submit results of the Baseline and Severely Adverse scenarios to FHFA and the Board on or before May 20, 2025.

The Federal Housing Finance Agency (FHFA) has published orders requiring that Fannie Mae and Freddie Mac (the Enterprises) report to the FHFA and to the Federal Reserve Board the results of the stress testing as required by 12 CFR 1238. The orders were signed by FHFA Acting Director Naa Awaa Tagoe.

Background. Section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), as amended by section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act requires certain financial companies with total consolidated assets of more than $250 billion, and which are regulated by a primary Federal financial regulatory agency, to conduct periodic stress tests to determine whether the companies have the capital necessary to absorb losses as a result of severely adverse economic conditions.

Based on their total consolidated asset amounts, function in the mortgage market, size of their retained portfolios, and their share of the mortgage securitization market, FHFA requires each Enterprise to conduct the stress test on an annual basis. Dodd-Frank Act stress testing is a forward-looking exercise that assesses the impact on capital levels that would result from immediate financial shocks and nine quarters of severely adverse economic conditions. Moreover, the FHFA has aligned the stress test scenario variables and assumptions with those used by the Board of Governors of the Federal Reserve System in its annual Dodd-Frank Act stress tests for its largest regulated entities.

2025 Stress Testing Scenarios. In addition to publishing the orders, the agency promulgated its Summary Instructions and Guidance, which includes general instructions and guidance relating to stress test scenarios and revised templates (baseline, severely adverse, and variables and assumptions) for regulated companies to use when reporting the results of the stress tests. The FHFA released the 2025 Scenarios templates, including the 2025 Scenario Variables and Assumptions Templates; 2025 Enterprise Stress Test Templates-Baseline; 2025 FHFA Enterprise Stress Test Templates-Severely Adverse; and 2025 FHFA DFAST Severely Adverse Market Shocks.

The stress tests are based on portfolios as of Dec. 31, 2024. The FHFA highlights that the planning horizon for the stress test is nine quarters, starting with the first quarter of 2025 and extending through the first quarter of 2027. The Enterprises are required to submit the results of stress tests based on two scenarios: Baseline and Severely Adverse. FHFA noted that it expects each Enterprise to use those variables that are relevant to the Enterprise’s lines of business and that are consumed by the Enterprise’s models.

While FHFA indicated that it expects each Enterprise to use those variables that are relevant to the Enterprise’s lines of business and that are consumed by the Enterprise’s models, however, FHFA expects each Enterprise to apply all of the relevant global market shocks provided. The Summary Instructions and Guidance included the following relevant variables and assumptions: Global Market Shock Assumptions; Counterparty Default Scenario Component; House Prices; Missing Variables; Balance Sheet Evolution; Capital Actions; Operational Risk Losses; and Changes in Accounting Standards.

Timing. The Enterprises must submit results of the Baseline and Severely Adverse scenarios to FHFA and the Board on or before May 20, 2025, and must publicly disclose a summary of the results of only the Severely Adverse scenario between Aug. 1 and Aug. 15, 2025.

The rule requires that each Enterprise take the results of the annual stress test into account in making changes as appropriate to its capital structure (including the level and composition of capital), exposures, concentrations, risk positions, plans for recovery and resolution, or plans to improve overall risk management.

Companies: Fannie Mae; Freddie Mac

RegulatoryActivity: DoddFrankAct FinancialStability GovernmentSponsoredEnterprises