Every month Fannie Mae and Freddie Mac are paying bondholders about $1 billion to cover seriously delinquent homeowners.

Guaranteeing timely payments on mortgage bonds is, of course, the government-sponsored enterprises' main business. But once a loan has been delinquent for four months Fannie and Freddie can buy it out of the pool and stop advancing unpaid interest to investors.

Ajay Rajadhyaksha, an analyst with Barclays PLC, said the companies should exercise this right a lot more often than they have been.

"Every day that passes," he said, "is another day in which wealth is transferred from the U.S. taxpayer" to bondholders.

The problem is that such buyouts would result in staggering hits to the GSEs' capital.

Under bondholder agreements, Fannie and Freddie would have to pay 100 cents on the dollar for the loans, but under accounting rules, they would have to then write the mortgages down to their steeply discounted market prices.

The paper losses would in turn force the GSEs to accelerate their draws on the $400 billion backstop the government has created to keep them solvent.

The roughly $100 billion the companies have taken from the Treasury so far has already come with a crippling dividend obligation. The more capital the GSEs take from the government, the bigger that cost becomes. Analysts said such a course would run counter to the aspiration that at least some part of the companies emerge from conservatorship intact.

Neither Fannie nor Freddie would discuss the matter.

Chris Dickerson, the deputy director for enterprise regulation at the Federal Housing Finance Agency, the GSEs' regulator and conservator, said buyouts of mortgages are accelerating as loan modifications increase.

"There's actually a real motivation for Fannie and Freddie to get these mortgages modified, and really to get them modified you have to pull them out," he said. If the Obama administration's Home Affordable Modification Program "goes well, then you will in fact start to see many mortgages come out of the trust to get modified."

But Rajadhyaksha estimated in a report published last week that with 75,000 loans falling 90 days past due each month, modifications and foreclosures would "merely stop the pipeline from growing further. Without a decision to buy out the loans, the pipeline is unlikely to be seriously depleted. And while that does not happen, the GSEs will continue to be responsible for the interest on the delinquent loans."

Arthur Frank, the director of MBS research at Deutsche Bank Securities Inc., said that poor market prices for delinquent loans, combined with stiff dividends on the capital the government has provided (10%, which would increase to 12% if the GSEs fail to make dividend payments in full in cash) "overwhelms the savings from the buyouts."

"That's why they haven't done it," Frank said. "That's why they let loans sit there delinquent in the pools until it's 24 months [past due] … or went into foreclosure or was modified." (In any of those three situations, a GSE is obligated to buy a loan out of a pool.)

Rajadhyaksha, Barclays' head of U.S. fixed-income and securitized products strategy, maintained in an interview that from the government's and the taxpayers' perspective, "they should absolutely do it. There's no question."

The cost to Fannie and Freddie of paying more in dividends, he noted, is not the government's problem; the payments go to the Treasury Department.

Frank said he does not expect a change in buyout policy until the GSEs are restructured. (The Obama administration has said it intends to unveil its proposal for reshaping the GSEs in February.) A rise in loan buyouts "seems more like a potential 2010 rather than a 2009 event," he said.

From the taxpayers' perspective, Frank argued that the potential savings on guaranteed interest payments is "pretty small potatoes" next to the overall losses from defaults.

Rajadhyaksha estimated that $180 billion to $200 billion of loans are now 90 days or more past due at the two GSEs, which equates to $12 billion in interest annually assuming a 6% coupon.

The calculus could be radically altered when the GSEs implement an overhaul to off-balance-sheet accounting rules at the beginning of next year.

The companies will likely have to take trillions of dollars of securitized loans they guarantee onto their balance sheets and set aside reserves for credit losses on them in one fell swoop. Individual valuation hits from troubled loans pulled out of securitization trusts would cease to be a factor.

Dickerson called the shift in off-balance sheet accounting a "game changer."

The hit under a reserving methodology will be "much less" than under the current system of measuring the market value of delinquent mortgages, he said. Loan buyouts after the consolidation of off-balance sheet vehicles will "create less accounting friction."

Still, Rajadhyaksha said, coming to terms with the capital hit now will be needed to justify a necessary increase in the level of support the government has pledged.

"You have to take these loans on at some point anyway," he said. "At some point people are going to realize how bad things are with the GSEs."

Barclays has estimated the GSEs will lose more on guarantees of mortgage bonds during the current housing downturn that they have earned in fees for such coverage in 30 years combined. Rajadhyaksha said the two GSEs could ultimately need to draw $200 billion to $300 billion in capital from their government backstops, meaning the $400 billion currently available "is too close for comfort."

And he said that the case for enlarging the government backstop should be made this year, while the administration has the authority to do so under the mid-2008 legislation that authorized the bailouts.

"What they should do is bite the bullet, take the hit right now," he said. "Take these loans onto your books, take the capital hit — and by the way, increase the capital line at the same time, because at this time you don't need to get Congress' permission to do it."

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