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60 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SECONDARY MARKET THE LATEST When the Going Gets Rough. . . Stress tests show GSEs would need another bailout in an economic downturn U nder severely adverse economic conditions, Fannie Mae and Fred- die Mac are projected to need another bailout totaling as high as $126 billion, according to a report from the Federal Housing Finance Agency. The Dodd-Frank Act Stress Tests (DFAST)—Severely Adverse Scenario report indicated that when hypothetical severely adverse economic conditions for a forecast horizon from December 31, 2015, to March 31, 2018, are applied, the GSEs would be projected to make incremental draws on Treasury ranging between $49.2 billion and $125.8 billion, depending on the treatment of deferred tax assets. Certain financial institutions with more than $10 billion in assets are required by the Dodd-Frank Act to conduct annual stress tests to determine if they can absorb losses during a period of adverse economic conditions. The condi - tions applied in the 2016 DFAST Severely Adverse Scenario report include an immediate decline in real GDP until it reaches a trough in Q1 2017 (representing a decline of 6.26 percent from the pre-recession peak), an increase in unemploy- ment rate from 5 percent at the be- ginning of the forecast horizon to a peak of 10 percent in Q 3 2017; and an increase in the consumer price inflation rate from 0.25 percent to a peak of 1.9 percent in Q 3 2017. Fannie Mae and Freddie Mac received a combined $187.5 billion bailout from taxpayers in 2008, at which time they were taken into conservatorship by the federal government. Stakeholders in the industry, as well as lawmakers have been concerned for at least a few years that the GSEs would need another draw on Treasury, since taxpayers remain on the hook while the FHFA's conserva - torships of the GSEs (which was intended to be temporary) is now in its eighth year. FHFA Director Mel Watt sound- ed the alarm in February when he gave a speech at the Bipartisan Policy Center in which he stated risks existed that were certain to escalate as long as the conservator- ships continue—namely, the GSEs' lack of a capital buffer puts them at risk of another taxpayer bailout. The capital buffer, currently $1.2 billion, is required by law to be reduced to zero by January 1, 2018. "I have consistently stated that our responsibility and role at FHFA as conservator is to manage in the present," Watt said in his February speech. "However, as we work to appropriately manage challenges and risks in the present, we also have a responsibility to assess when these challenges and risks may escalate to the point that they negatively impact the Enterprises and the broader hous - ing finance market in the future. By giving this speech today, I am signaling my belief that some of the challenges and risks we are manag- ing are escalating and will continue to do so the longer the Enterprises remain in conservatorship."