We have reviewed the Fannie and Freddie 1Q reports with an eye to why they differed so much in terms of net earnings. Our conclusion is that Fannie finally raised its loss reserves to match Freddie’s as a percentage of nonperforming loans. The difference in modelling between the two GSEs as shown in the differing loss reserves  — a critical prudential criterion — raises questions as to why FHFA has decided not to require the same loss modelling for both GSEs.  Loss reserves are, of course, a critical bulwark against loss – the point of having them.  And, for the GSEs, losses drive draws from Treasury.  If the GSEs are doing these calculations differently, then taxpayers are either taking too much or too little risk.

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