Fannie, Freddie bailout may rise

WASHINGTON -- The federal government's seizure of Fannie Mae and Freddie Mac could cost billions more as mounting troubles in the credit and housing markets have further undermined the mortgage giants since the government seized them.

The Treasury Department likely will have to dramatically increase aid to Fannie Mae and Freddie Mac, and some analysts say the cost could exceed the government's worst-case scenario, requiring more than the $200 billion it has set aside for the two companies.

Although not a cent has been spent, the first injection of cash could come as soon as today, when Freddie Mac reports its quarterly earnings.

The prospect of growing aid underscores how the government is being sucked ever deeper into supporting financial firms with taxpayer money as the worsening financial crisis continues to erode companies that federal officials have vowed are too important to fail.

Under the government's agreement with the companies, the Treasury is required to inject money in any quarter when the companies' liabilities exceed their assets, up to $100 billion for each firm.

When the Treasury seized the firms, it said it had chosen the figures primarily to reassure investors who had been fleeing the companies, suggesting there was no expectation the government was going to spend this amount.

But the financial crisis has deepened, making it even more difficult for the companies to finance their debt, and the economy has been shrinking, staggering the ability of borrowers to make mortgage payments that are at the heart of the firms' business.

"Depending on what happens with housing, you could see scenarios where the $100 billion comes into the question," said Rajiv Setia, an analyst with Barclays Capital.

He said McLean, Va.-based Freddie Mac may need $40 billion by the end of the year.

On Monday, Washington-based Fannie Mae reported a whopping $29 billion loss, bringing it close to triggering a government cash injection. Most of that loss was because the company wrote down the value of tax credits it is unlikely to use.

"If we continue to experience substantial losses in future periods or to the extent that we experience a liquidity crisis that prevents us from accessing the unsecured debt markets," Fannie Mae said in a regulatory filing this week, "this commitment may not be sufficient to keep us in solvent condition."

Many analysts consider Freddie Mac to be in worse shape and, if it makes the same decision as Fannie Mae regarding tax credits, it would report today that it owes billions more in obligations than it has in assets, triggering the government injection of cash.

In addition to pledging capital, the government also offered them an unlimited line of credit.

In return for these backstops, Fannie Mae and Freddie Mac each agreed to give the Treasury $1 billion in preferred stock and pay $100 million a year as a dividend. The companies' boards also turned over control of the firms to the Federal Housing Finance Agency.

The government's backstops are "well above the worst-case stress test that was run," said FHFA Director James Lockhart.

Some analysts are skeptical that the federal backstops were ever enough. Joshua Rosner, an analyst with Graham Fisher, points out that the housing decline under way is the worst since the Great Depression, but Fannie Mae and Freddie Mac's have not seen most of the resulting losses. So far, these have not even rivaled what was experienced in the most recent bad real estate slump, in the late 1980s.

"If we saw loss rates at those levels, we would quickly eat through the $200 billion," Rosner said. "This is a once-in-a-century flood."

Fannie Mae said this week that home prices are about halfway through their decline. The company said prices are down 10 percent from their peak in 2006 and likely to fall up to 19 percent before stabilizing.