The logic, according to Mr. Paulson, behind the cash infusion to the mortgage giants is to send a message to the markets that Fannie and Freddie have plenty of muscle behind them. “The more flexibility we have on the credit facility, the more confidence you have in the market and the greater protection to the taxpayer because the less likely it will be used,” stated Mr. Paulson.

The main regulator of Fannie and Freddie is the Office of Federal Housing Enterprise Oversight, or Ofheo. Ofheo reports that both mortgage lenders held adequate capital cushions at the end of 2007, however cushions did grow alarmingly low throughout the year. In November 2007, Freddie Mac’s cushion became so low that the lender failed to meet Ofheo’s directed capital requirement and only after very large capital infusions did Freddie’s year end cushion greatly enhance.

The report also showed that Fannie and Freddie retained a mortgage portfolio that contained a combined total of $313 billion in private label mortgages ending in 2007. Private label mortgages are conventional single family jumbo mortgages, do not meet underwriting guidelines because of credit issues (aka: sub-prime mortgages), or provide little to no documentation (aka: liar loans). Of the $313 billion in private label mortgages, $214 billion are adjustable rate mortgages that have already or are nearing their adjustment periods. Although Fannie and Freddie currently have adequate capital cushions, their private label mortgage portfolio poises a great risk to them.

In conclusion, this cash infusion that is being pushed so hard for will be desperately needed for these two mortgage giants as the real estate and credit crisis continues to deteriorate. If the cash is made accessible to the two companies today it only saves the hassle of the government having to step in when desperation sets in.

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