Fannie and Freddie vs. Jason: Even Scarier

We've been writing about mortgage giants Freddie Mac (NYSE: FRE  ) and Fannie Mae (NYSE: FNM  ) as their misguided accounting practices have come to light over the past several months. With that in mind, before we get into today's happenings, it's probably a good idea to give you a brief recap on these troubled titans of the mortgage business.

The Federal Home Loan Mortgage Corporation, or Freddie Mac, and the Federal National Mortgage Association, or Fannie Mae, are congressionally chartered corporations that purchase residential mortgages from various lenders, securitize them, and then resell those loans to investors in the debt markets (I know, I know, exciting stuff, but it gets better).

All that basically means that these institutions, whose securities have the implied backing of the U.S. government, are huge players in the mortgage investment arena, and potential problems here add extra-strength antacid to a lot of diets.

That's why recent news of accounting shenanigans and three-plus years of earnings restatements have really put the kibosh on these stocks. And, fresh on the heels of myriad accounting scandals across this great country, calls for action are lighting the switchboards all over the Capitol.

As Bill Mann mentioned in his recent article, the lack of disclosure historically required by these companies has regulators fearing what could be under the hood. And they should be fearful, since according to Reuters, these companies own or underwrite nearly half of the $7.1 trillion (yes, with a "t") in U.S. mortgage debt. If that doesn't make this whole thing scarier than Freddy vs. Jason (the scariness of the film's success more than the movie itself, of course), I don't know what would.

Interestingly, all this terror is prompting the administration to recommend today that Congress assume regulation of both Fannie and Freddie "to reassure markets [that Freddie and Fannie] do not pose a risk to the financial system."

Frankly, implied or not, the government is on the line for a lot of dough here, and when one considers that the end of that line has been held for a number of years by people with demonstrated moral and ethical challenges, I'm not sure the move is going to cut down on antacid use anytime soon.


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