In this report, we evaluate the FHFA annual examination reports’ conclusions for Fannie and Freddie; our next report will look at the still worse situation at the FHLBs. We conclude that the most significant risks at Fannie and Freddie aren’t on the credit-risk side – long understood as a very sore spot – but rather on the liquidity and interest-rate risk front. Any market shock will bring these simmering risks to the fore, forcing Treasury back big-time as a backstop for one or both GSEs.

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