Fannie Mae and Freddie Mac Need Billions to Prop Continued Mortgage Losses

Just days after Freddie Mac announced a need for $35 billion, Fannie Mae says it needs $16 billion in federal aid. Continued deterioration in mortgage assets have now driven these enterprises net worth below zero in the last quarter, according to recent securities filings.

These two recently nationalized government-sponsored enterprises make up the largest source of mortgage financing in the US. Fannie and Freddie own or guarantee $5.2 trillion of the $12 trillion of the US mortgage market. A fact that makes them central to eventual mortgage and housing market recovery.

These requests will be draws on the $200 billion in emergency funds established by the US Treasury. For Fannie Mae this will be its first request. However, Freddie Mac has already taken $13.8 billion of its lifeline in November 2008. This latest request means Freddie Mac has already eaten through half of its allocated emergency fund of $100 billion.

Bloomberg cites Rajiv Setia, fixed-income strategist at Barclays in estimating that Fannie Mae will take another $50 billion and Freddie Mac another $70 billion by year-end. That raises an obvious question: What happens when they hit the $100 billion allocation cap?

Many analyst think that day is inevitable. Setia, warns that policymakers should be "proactive" is watching and anticipating an adjustment in that upper limit. These enterprises are not getting healthier, both have posted five consecutive losing quarters totaling $68.4 billion in declining value. As mortgages continue to default and the homes that secure these assets continue to lose value--the bottom is uncertain.

Meanwhile, the US Treasury is getting similar warnings from two other financial giants--Bank of America and Citigroup. All financial institutions are reeling from record foreclosure levels, despite enormous loan modification efforts.

The US Treasury has continued to reaffirm its position to continue capitalizing Fannie and Freddie as the value of their assets plunge below obligations. The question is, how deep will that taxpayer funded hole be?