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Federal Stress Tests Make Compelling Argument to End Fannie and Freddie Net Worth Sweep 



Time for Trump administration to stop GSE earnings theft





WASHINGTON, D.C. – The Federal Housing Finance Agency’s (FHFA) publication on Monday, Aug. 7, of the most recent implementation of the Dodd-Frank Act Stress Tests (DFAST) for Fannie Mae and Freddie Mac leaves no doubt the “Net Worth Sweep” should be ended this quarter, with the two Government Sponsored Enterprises (GSEs), given that under the most severe credit-loss scenario neither GSE is at any risk of depleting their remaining Treasury commitments.

“The FHFA DFAST analysis released this week demonstrates if the GSEs did not establish a valuation allowance on their deferred tax-assets, under the most severely adverse scenario, the GSEs would require $34.8 billion in capital,” Joshua Rosner, managing director of the independent research firm Graham Fisher & Co., headquartered in New York City, explained to in an exclusive email.

“With the establishment of a valuation allowance on their DTAs they would require $99.6 billion,” Rosner continued. “Under this adverse scenario the GSEs combined credit-losses would be $19.2 billion or .38bp of their portfolios. Neither GSE would be at risk of coming anywhere depleting their remaining Treasury commitments.”

Rosner is a widely-recognized authority on Fannie Mae and Freddie Mac, known for co-authoring with Pulitzer Prize-winning business reporter the 2011 bestselling book entitled, Reckless Endangerment: How Outside Ambition, Greed and Corruption Led to Economic Armageddon, an analysis of Fannie Mae’s role in the sub-prime mortgage crisis that led to the economic downturn of 2008/2009.

“It is increasingly clear that, in 2008, Congress passed, and President Bush signed, appropriate and effective legislation in the form of the Housing and Economic Recovery Act,” Rosner stressed.

“While Congress may choose to try to legislate changes to fine-tune the reforms, there is little reason and less legislative will to engage in a full-scale recreation of the secondary mortgage market,” Rosner concluded.

“Given this lack of will, we continue to expect the Director of FHFA will suspend the net-worth-sweep before the end of the year,” Rosner stressed. “We further expect that he, in coordination with the President and Treasury Secretary Mnuchin, will then begin the process of finalizing administrative reforms to the GSEs and place them on a path to privatization.”



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