Some of these high-risk loans fall into multiple categories and shouldn't be double-counted, but you get the picture: Fannie has significant exposure to high-risk loans and only a small capital cushion to protect itself.
Freddie Mac has a few hundred billion dollars of high-risk loans in its $2.1 trillion book of mortgages. And Freddie's capital cushion is a meager $40 billion.
Each has reported billions in losses, and they will report billions more as foreclosures accelerate across the country. What happens if their problem loans fall so far in value that their capital is wiped out? There's only one bank large enough to take over Fannie's and Freddie's debts: the U.S. Treasury. Taxpayers.
Yet despite the substantial risk facing Fannie and Freddie, many in Washington want the two companies to back more and bigger mortgages in a shortsighted attempt to blunt the impact of the housing crash.
In 2005, Mr. Paul introduced an amendment in Congress to end the implicit taxpayer guarantee backing Fannie's and Freddie's debt. He said at the time: "I hope my colleagues join me in protecting taxpayers from having to bail out Fannie Mae and Freddie Mac when the housing bubble bursts."
At this point, Fannie's and Freddie's positions are too precarious to remove the federal guarantee backing their debt. Doing so could lead to more trouble in the housing market and panic in the financial market.
Future damage can still be contained, however, if we do two things. First, we must demand tighter regulations that limit Fannie's and Freddie's overall mortgage portfolios. At the same time, we must not allow Congress to increase the size of mortgages Fannie and Freddie are allowed to securitize.
It's a shame others in Congress weren't listening to Ron Paul in 2005.
Rolfe Winkler, a chartered financial analyst, is publisher of OptionARMageddon.com. His e-mail is rolfewinkler@yahoo.com.
