Once, it might have shocked the markets to hear that Fannie Mae and Freddie Mac may well need more than the $200 billion the government pledged to backstop them.
After all, the government-sponsored enterprises' debt costs soared in the fall, in part because investors believed they did not get adequate assurance that the government, having taken over the GSEs, would stand behind their securities.
But last month, news that losses at Fannie and Freddie were rapidly eating through the $200 billion buffer caused nary a blip in the yield spread between their bonds and benchmark rates. Analysts said the relatively calm reaction this time suggests the market is more confident in the government's commitment to keeping the GSEs afloat. It could also reflect the preponderant force of the Federal Reserve Board's direct purchases of agency securities, a program that began last month.
Wider spreads would have complicated the government's effort to keep mortgage rates low and support the housing market. Secondary market pricing determines the rates lenders can offer on individual mortgages.
Last week Fannie estimated it would need $11 billion to $16 billion under its $100 billion backstop, implying a fourth-quarter loss of up to about $25 billion based on its net worth at Sept. 30.
Freddie's net worth fell to a deficit of $13.8 billion as of Sept. 30, prompting an equivalent draw from the Treasury Department under an arrangement through which the government has agreed to supply up to $100 billion to keep the company above water.
In January, citing preliminary fourth-quarter results, Freddie estimated it would need up to an additional $35 billion. Drawing that amount would put Freddie almost halfway through the total available.
Jim Vogel, the head of fixed-income research at First Horizon National Corp.'s First Financial Capital Markets Corp., said one reason spreads on so-called agency debt did not widen in reaction to news of the large drawdowns was improved confidence in the government's support structure.
"Now that we're seeing it in action, it's far easier to discuss and see that this capital position is going to be in position for quite a while," he said.
Peter Wallison, a fellow at the American Enterprise Institute, said that while there are larger concerns about the weight of the government's growing interventions generally, "what the market is assuming now is that the government will just keep feeding money into" the GSEs "as necessary to keep them functioning. Because they have to be kept functioning in order for our real estate finance system to work."
Michael Chang, an interest rate strategist with Credit Suisse Group Inc., said his guess is that "the government is going to probably have to put up more capital" if the backstops are exhausted. "You can't let them fail."
Demand for agency mortgage-backed bonds — largely coming from the Fed — is a more important factor for spreads right now than any doubts about the government's support for the securities, he said.
Mr. Wallison, a longtime critic of Fannie and Freddie, put the chances of the GSEs exhausting their $100 billion backstops at "100%."
He cited rising defaults among prime loans and, in particular, the GSEs' obligations for alternative-A and subprime mortgages.
"I don't think the backstops amount to very much in terms of what their total obligations are," he said.
In a report last week, analysts with Barclays PLC's investment bank projected that Fannie might draw another $50 billion from Treasury, the bulk of it this year, based on their projection for losses in the company's guarantee business. That projection assumed that unemployment will peak at 8.3%. The analysts predicted that Freddie might draw another $30 billion.
But they wrote that if unemployment exceeds 9%, losses will "grow exponentially" and the existing backstops "could easily be breached."
Mr. Vogel argued the trajectory of losses at Fannie and Freddie is not yet clear. Mark-to-market losses on derivatives — a major factor at the GSEs — are likely to reverse over time, he said.
Still, "we're not going to have a really good idea on this until the middle of May when we see first-quarter earnings," Mr. Vogel said. "People felt that we were going to get cleanup" — big losses that would not likely be repeated in subsequent periods — "in the third and fourth quarters. And until you can see what might be a more normal quarter, you're not going to have an idea of the real operating pace of the need for additional draws."
Fannie declined to comment, citing a quiet period preceding its yearend financial report. Freddie said it would not speculate on whether it would use up the $100 billion and referred questions about the nature of what federal officials have called the "effective guarantee" to the Federal Housing Finance Agency.
In an e-mailed reply to questions from American Banker, James Lockhart, the director of the agency, the GSEs' regulator and now their conservator, said: "We continually assess current conditions at the Enterprises and their financial forecasting, including stress testing. At the same time, we are working with the Enterprises and government agencies to improve underlying market conditions, prevent foreclosures and mitigate losses."
The Barclays analysts wrote that in the week that ended Jan. 29, agency spreads to Treasuries tightened by 4 or 5 basis points for bonds with maturities of two, three, and five years but widened 2 basis points for 10-year maturities and 1 basis point for 30-year maturities.
Mainstay investors have already shifted away from the market.
In another report released in January, Barclays analysts wrote that there "is no doubt that foreign investors often view agency mortgage credit issues … more cautiously than domestic investors," and that there was a clear pullback by these investors last year from purchases of mortgage bonds issued by Fannie and Freddie. (In addition to a move to Treasuries, the analysts wrote that foreign investors have demonstrated "relative enthusiasm" for Ginnie Maes, which carry an "explicit" guarantee.)
Nevertheless, Barclays' projected demand from the government — $500 billion from the Fed and $150 billion from the Treasury — compares with a projection for total agency supply of $670 billion.
Still, the Barclays analysts wrote last week that they "hope that regulators preemptively take" action in assuring markets about the level of support "to prevent yet another risk flare in the agency debt markets."
Mr. Wallison said that despite the increasing losses, the GSEs are still essentially creatures of government housing policy.
"They ought to be the key players in stabilizing the housing market," and "the government ought to pump more money into them so they can continue to buy more mortgages, even if there are a lot of risks associated with their mortgages," he said. "And there are, because we don't know how far the housing market will decline. But someone has to take the risk, and it should be the government."