Is It Any Wonder?

Investors keep hoping for a happy ending, but the facts suggest otherwise.

The nation's largest mortage lenders don't have nearly enough capital, they are heavily exposed to a housing market that remains in free fall, and they have a mission that is muddled by political, social and commercial interests.

Aside from that, they have grown to a size that has made them unwieldy and unstable.

Is it any wonder that we are seeing reports like the following, "Fannie and Freddie Capital Alert." from the Financial Times?

The government-backed mortgage companies that finance the bulk of new US home loans may not have enough capital to withstand the plunge in the country's housing market, according to one of Washington's most senior financial legislators.

In an interview with the Financial Times, Richard Shelby, the senior Republican on the Senate banking committee, said Fannie Mae and Freddie Mac were "thinly capitalised, highly leveraged and pose a systemic risk to taxpayers".

"I worry about the failure of the institutions," he said. "My interest ... is to try to make sure they are strong enough financially to withstand a real downturn in the housing market."

The two companies are perceived to have implicit government backing which investors believe would trigger a bail out in the event of collapse, but the government has never had to exercise the guarantee.

The comments by Mr Shelby come amid talks in Congress over new housing legislation and the future of Fannie Mae and Freddie Mac, which have experienced heavy losses amid the mortgage crisis.

Mr Shelby and Chris Dodd, the Democratic chairman of the banking committee, are working to hammer out a bipartisan bill that would expand the Federal Housing Administration, the government insurer for mortgages to those with low incomes.

The aim of the bill is to halt the wave of foreclosures by allowing the FHA to guarantee the refinancing of up to $400bn (€260bn, £205bn) in loans to reflect lower house prices, with lenders voluntarily agreeing to forgive a chunk of their loans.

The bill would also create a powerful new regulator for Fannie Mae and Freddie Mac, and Mr Shelby is pressing Democrats to grant the body a higher level of "discretion" to force the companies to raise their capital requirements.

"I just think that the capital today is so thin, considering the losses, that it is dangerous," he said.

The legislators must agree a text by Thursday morning, when the banking committee will vote on both measures. Mr Dodd released details of the bill on Monday, but has so far failed to garner Mr Shelby's backing.

"We are not there yet," Mr Shelby said shortly before Mr Dodd's announcement. Afterwards, a spokesman for Mr Shelby said "it remains to be seen whether an agreement can be reached."

The support of Republicans in the Senate is critical because 60 votes out of 100 are needed to advance legislation. The White House and many Republicans oppose the FHA plan on the grounds that it amounts to a bail out of speculators that puts taxpayer money at risk.

Mr Shelby said he worried the plan would raise "false hopes that it would take care of the housing crisis," but did not to rule it out.