Fannie, Freddie Can't Do More

To remedy the U.S. mortgage crisis, Congress is considering loosening the regulatory reins on two publicly traded financial behemoths that, not long ago, were mired in accounting scandals and forced to make earnings restatements totaling more than $20 billion -- dwarfing those of Enron and WorldCom combined.

Their top executives have since been replaced, but the two government-sponsored entities, Fannie Mae (FNM - Cramer's Take - Stockpickr) and Freddie Mac (FRE - Cramer's Take - Stockpickr), are still not up to date in their financial reporting, and many "safety and soundness issues" remain unresolved at both companies, according to federal regulators.

But that hasn't stopped Fannie and Freddie from saying they could help clean up the mortgage mess.

Their top executives, with support from the mortgage industry, are prodding lawmakers to loosen restrictions on the size of their lending portfolios and grant them access to the so-called jumbo mortgage market.

Such a move could alleviate some pain for lenders and borrowers suffering a sharp downturn in the housing market. But supporters are overlooking that it would also add to a volcano of risk mounting at Fannie and Freddie that threatens to erupt someday and shake the U.S. financial system.

The portfolios of both Fannie and Freddie have grown steadily over the years thanks to the implicit backing of the federal government, which allows them to issue debt at highly favorable rates and take on more risk. Together, they own or guarantee roughly 45% of all residential mortgages, with combined loan portfolios valued at $4 trillion.