With each new month, more bad news piles up about Freddie Mac and Fannie Mae, the two government-chartered, but publicly traded, mortgage finance companies. In January, Freddie reported that it expects a more than $1 billion loss in the second half of 2006. In a December filing with the Securities and Exchange Commission, Fannie Mae released its final report of after-tax loss in earnings in the amount of $7.9 billion for fiscal year 2002 through fiscal year 2004. And, notwithstanding the progress that Fannie has made in filing its financial statements, Standard & Poor’s has recently found pervasive deficiencies in Fannie’s internal controls.
If Fannie or Freddie were to become insolvent, the American taxpayer would be on the hook for the cost of making good on the implied guarantee that the federal government gives to investors who have purchased the many hundreds of billions of dollars of Fannie and Freddie securities that are currently outstanding.
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