Testing for What, Why?
FHFA, Fannie, and Freddie yesterday released the results of FHFA’s latest stress test, focusing on the severely-adverse scenario in order – or so FHFA says – to push the GSEs to the limit. This the test does insofar as the GSEs’ combined CET1 capital shortfall is as much as $159 billion. However, aspects of FHFA’s test – e.g., falling inflation over 2022 and 2023 and rising house prices – are likely to be more than a bit off. The conservatorship of course insulates the GSEs from any of the consequences that would befall a big bank with even a fraction of these capital shortfalls, but it does cast doubt on when these conservatorships could end without a large line of Treasury credit still in place to back them up.