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Think of it like this. Let's say we don't have any info on how many mortgages are going to default. We know there were maybe 8 million homes that changed hands since Bernanke took over. Let's say half of them involve defaults -- some of them double defaults because of home-equity lines. The average house? Let's call it $300,000, which is high, plus $20,000 per home-equity line to help pay for the first mortgage. In fact, all of these numbers are high.

Now, 4 million homes times $320,000 equals $1.28 trillion. Now back out the recoverables -- how much the banks can get -- of perhaps 50%. Again these are hysterically negative numbers, and you have $600 billion in losses, of which $400 billion have already been taken. How much is Fannie/Freddie? Given that the average home is $300,000 -- the answer is all of it that isn't currently accounted for, $200 billion.

Given the fact that we can't include the recoverables ahead, you simply subtract $400 billion in charges from $1.28 trillion and you get $880 billion.

That's probably the worst-case scenario.

Neither company comes even close to having the reserves for those losses.

So, when you do that math, you get something astronomical that FNM and FRE might be on the hook for in the next two years even though after that the money will start flowing back.

The essence of what could be happening is this: The companies are worth investing in if the regulators show forbearance against the next two years of losses. Why two years? Because then you will have two years more of seasoning and we will know definitively the default rates that we lack now.