disregarding their possible losses for bad loans...they have been engaging in questionable accounting for the last decade and it appears that if they are to survive they will need an act of congress to relieve them of the FASB reporting requirements.
they may be too big to let fail but their distress will ripple through all corners of the economy. . this is a story to watch. their failure would make the subprime mess look like a spit in the ocean.
Based on your comments I suspect there is quite a bit more to you than your profile reveals. As a broker what I like about this issue is that it brings to light how mortgages are really owned. Direct lenders are more than happy to perpetuate the misconception that they portfolio loans they originate when infact most of them are sold to Fannie & Freddie. Would you agree with this statement?
The term "conforming loan" refers to loan guidelines that conform to the guidelines Fannie & Freddie will buy. The most well know is the maximum loan amout of $417k. As you correctly point out, neither Fannie or Freddie keep these loans. They bundle them other loans having similar characteristics and sell the on wall street as mortgage backed securites/bonds.
International institutional investors like pension fund managers buy these bonds for and rely on their steady stream of income (your mortgage payment) to make their own payments to pension recipients & insurance annuitiy holders.
While a certain percentage of default is factored into these, exceeding this can endanger the buyers ability to meet their own monthly obligations and therefore they typically expect that the issuer (Fannie & Freddie) will buy back non-performing loans.
The issue of late seems to deal with the way Fannie & Freddie account for this potential liability on their financial statements. Apparently their current practice of not showing this risk on their books may not meed Generaly Acceptible Accounting Principle (GAAP) guidelines. Forcing them to put this back on their books could severely damage their financial position.
Here is a link for more information. http://www.thetruthaboutmortgage.com/fannie-and-freddie-unde
They won't run out of cash to purchase loans, however. The stock price and balance sheet shortgage are important, but the key factor for Fannie and Freddie to attract investors for Mortgage Backed Securities (the source of money for Fannie and Freddie to buy loans from banks) is the rate of interest and corresponing yield on the MBSs. A simple solution if investors are jittery is to jack up the yields (and corresponding mortgage interest rates charged by banks to borrowers).
If the problem persists, we'll probably see conforming loan interest rates return to the normal range of 7.5%-9.25% rather than the 5.75%-6.75% we've seen over the past few years.