Fannie, Freddie Media Panic Overblown

Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote) are dominant players the bond market. Not only are they the biggest non-Treasury issuers of straight-debt securities, mortgage-backed bonds guaranteed by the two giants represent over 30% of the total taxable bond market. Therefore, the problems at the GSEs probably touch just about every investor directly in a way few other companies would.

While delinquencies on their guarantee portfolio remain relatively small (0.81% for Freddie Mac and 1.22% for Fannie Mae), the fact is that both companies employ tremendous leverage, and therefore, losses even mildly above historic norms are likely to put huge pressure on the company's equity.

In addition, Freddie Mac has yet to complete the $5.5 billion capital raise they promised in May, and given market conditions, this will be all but impossible without government intervention. So I'm not here to challenge the plunging share price of either Fannie Mae or Freddie Mac.

But there are three really silly things being reported in the media right now that need clearing up.

First of all, Financial Accounting Standard (FAS) 140 -- which requires off-balance-sheet assets and liabilities to be placed back onto the balance sheet -- has nothing to do with anything. Or at least, it should have nothing to do with anything. A revision to FAS 140 would tighten the rules about off-balance sheet accounting.

Based on how both GSEs currently operate, this would probably require both Fannie Mae and Freddie Mac to bring their guarantee portfolios on balance sheet. Under current statues, the GSEs' minimum capital required is 0.45% of their guarantee portfolio and 2.5% of their aggregate on-balance-sheet assets.