NCPA - National Center for Policy Analysis

Fannie and Freddie Debt Make Some Analysts Queasy

February 20, 2002

Were Fannie Mae and Freddie Mac -- the two "government-sponsored enterprises" that hold the majority of all home mortgages in the U.S. -- to fail for some reason, American taxpayers would probably be forced to foot the horrendous bill. That should be cause enough to keep a keen eye on their financial performance -- and especially their debt.

The current picture is enough to make analysts queasy.

  • The two have been growing their debt at an annual rate of 25 percent -- to a current level of about $2.6 trillion.
  • Government budgeteers also express some anxiety about their increasing dependence on those sometimes notorious financial instruments called derivatives.
  • Last year, Fannie Mae's debt/equity ratio was about 60 to 1 -- more than five times the average for commercial banks -- and as a mortgage lender, its portfolio cannot be called diversified.

Experts explain that Fannie Mae and Freddie Mac face two kinds of risk. There is credit risk from the possibility that mortgage holders will default -- always a threat in a severe recession. Then there is interest rate risk from the possibility that mortgage holders will prepay -- leaving the two lending at low rates and borrowing at high rates.

Analysts see parallels to Enron, including the fact that their financial disclosure practices are terrible -- they don't have to file financial statements with the Securities and Exchange Commission. Also, both entities engage firms to be both auditors of their books and consultants to them. Freddie Mac's auditor/consultant happens to be Arthur Andersen.

Source: Editorial, "Fannie Mae Enron?" Wall Street Journal, February 20, 2002.


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