Are Fannie Mae and Freddie Mac A Danger To US Economy?

When trying to see the long term implications of the housing slowdown and the credit crisis, you have to put the 2 quasi governmental lenders front and center in the discussion. Fannie Mae and Freddie Mac combined provide the support structure for mortgage lending in the United States. Be it setting benchmarks on lending or providing a support structure for the mortgage market, Freddie and Fannie both lead the way.

So when the governments top guy in overseeing these two lending monsters goes public that they are both under capitalized, it gives me a cause for concern. We have all tried to get past the misdeeds of Franklin Raines running Fannie Mae into the ground just a few years ago. And that was in a white hot real estate market.

With the market down any weakness emanating from these two lenders could really put a crimp into the fragile lending marketplace. Time for these guys to get their balance sheets under control.

With that skimpy capital cushion, the government-sponsored companies “could pose significant risk to taxpayers as well as to financial institutions and other investors,” the regulator, James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said at a conference in Chicago.

The Senate Banking Committee is prepared to vote as early as Tuesday on legislation aimed at improving regulation of Fannie and Freddie. That bill would replace Ofheo with a new regulatory agency holding more authority to adjust capital requirements for Fannie and Freddie. The House already has passed a version of that legislation.

Fannie and Freddie each have “core” capital equaling less than 2% of the mortgages they own or guarantee. Fannie’s core capital as of March 31 was about $43 billion, and the company has since then raised about $6.5 billion more through sales of common and preferred shares, bringing the total to around $50 billion