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Taxpayers Pick Up Tab


Fannie, Freddie vehicles for nationalization.

Nationalization is a process, not an announcement, and it's becoming increasingly clear who's going to pick up the bill for the mortgage crisis.

Fannie Mae (FNM) and Freddie Mac (FRE) have been the sole source of liquidity for the mortgage market since last summer, and the two report fourth quarter results in the coming week. According to French bank BNP Paribas, the mortgage market is so reliant on funds from these two entities that it has been "effectively nationalized."

Fannie and Freddie buy loans from lenders around the country and repackage the debt as securities carrying an implicit backing from the U.S. government. That they focus on prime loans -- those given to borrowers with strong credit who can post moderate down payments -- has not sheltered them from the mortgage crisis.

Amid rising defaults in their loan portfolio, Fannie and Freddie were forced to raise a combined $13 billion to strengthen their balance sheets late last year . Prime delinquencies are currently rising at a faster rate than those for subprime loans, which could cause further losses at the two government sponsored entities.

The fiscal stimulus package rushed through congress expands Fannie and Freddie's role in freeing up the market for large mortgages. To make up for rising losses, they're charging lenders higher fees, which are passed directly on to borrowers. Despite aggressive Fed intervention, this is one of the reasons we're seeing mortgage rates continue to rise.

Both Fannie and Freddie are expected to post losses for the fourth quarter, and few expect another frantic round of equity sales to raise capital. More telling than just the loss figures, however, will be delinquency data showing just how far the subprime contagion has spread.
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