Fannie and Freddie, what's up these days?

A good article from David Wessel in the 6-12-08 WSJ: Mortgagers' Dual Roles Clash. Freddie and Fannie are ungainly hybrids. They're part shareholder-owned profit-making companies, part government agencies with a mission to make mortgages cheaper and more widely available. And they're huge, much bigger than Bear Stearns, the investment bank whose collapse, we were told, threatened the entire financial system. The housing bust is heightening the tension between the two parts of the hybrid. Falling house prices and rising delinquencies weaken the companies financially, raising concerns about their stability and the risks they pose to taxpayers. Their entire business is housing. But the past year also underscores the societal importance of their mission: making home ownership more affordable and rescuing the economy when housing goes bust.
Fannie and Freddie make big profits for shareholders and pay high salaries. Shareholders benefit because Fannie and Freddie borrow more heavily than other financial companies and more cheaply, because everyone who lends them money assumes -- correctly -- that the U.S. government stands behind their debt, and that they agree to be regulated. (Based on recent public filings, Freddie and Fannie have a debt-to-equity ratio -- a measure of how leveraged they are -- of 27.6 & 19.6, respectively. By contrast, the ratio at B of A and J.P. Morgan Chase is about 3.9, and their stocks are getting hammered.)
Today the government essentially is telling Fannie and Freddie to lend more, tolerate delinquencies, and raise capital at unfavorable prices for the good of the economy, even if you don't believe it's in shareholders best interests.
Fannie and Freddie -- and thus taxpayers -- take the risk that interest rates will turn against them, creating a devastating mismatch between the rates they pay to borrow and the rates they receive on their huge portfolios of mortgages. That was before the previously unimaginable happened: a widespread decline in house prices.
Fannie and Freddie already have absorbed huge losses, not only on the mortgage-linked securities they hold but also on the $4 trillion in guarantees they have made on principal and interest on mortgages turned into securities held by others. They face bigger losses if house prices fall an additional 10% or 15%, as is widely predicted.
Privatization and nationalization are conceptually pure and politically improbable. Today, half of Congress wants Fannie and Freddie to pick up the pieces from the subprime debacle and lend more; the other half wants to block them from exposing taxpayers to additional risks.