Fannie-Freddie II: The Wrath of Obama

So why did the Obama Administration last week increase the amount of Fannie Mae and Freddie Mac losses it would cover from the previous limit of $400 billion to the new limit of infinity? In the simplest terms, it was to reassure investors like China or Saudi Arabia who have bought or might buy in the future the securities of Fannie or Freddie. But among mortgage professionals I have spoken with, there is a general feeling, too, that the extra funds will be needed.

"They've been hiding losses as long as they can and will soon have to start taking them, " said one friend who has been in the mortgage business much of his life.

Remember that the amount of room left under the previous cap for guaranteed losses at Fannie and Freddie was $289 billion ($400 billion minus $111 billion already spent). The amount of Fannie and Freddie securities in the market totals about $5.5 trillion. So, for another $289 billion in loans to go sour, you'd need only 5.2 per cent of existing mortgages to fail. Right now, 4.7 percent of U.S. mortgages are in default, under foreclosure, or bank-owned. Most of those homes will be lost in the next 12 months.