James H. Carr , FORBES CONTRIBUTOR

Last month, Mel Watt, director of the Federal Housing Finance Agency (FHFA), announced that the two mortgage giants, Fannie Mae and Freddie Mac, could require a federal bailout of as much as $100 billion in the event of an economic downturn.

In fact, a bailout of these two institutions is inevitable as early as next year, if not sooner. The need for an emergency draw on the U.S. Treasury Department to fund these agencies, however, will have nothing to do with the financial health of either Fannie Mae or Freddie Mac.

Both agencies are exceptionally well-managed and regulated, and are highly profitable; they reported combined earnings of nearly $10 billion in the first six months of this year. As with the most recent meltdown of the housing market, irresponsible federal housing oversight will be the cause of their failures.

During the buildup to the collapse of the housing market that began in 2007, federal financial regulators ignored the many obvious predatory features of subprime lending and allowed reckless, exploitative, and fraudulent mortgage finance-related practices to permeate the mortgage market.

The result was nearly 8 million foreclosures since 2007, collapse of home prices of more than 30% nationally, and the near implosion of the U.S. financial system.

This time around, federal policy makers have structured bailout terms for Fannie Mae and Freddie Mac that require that all earnings of the two agencies be “swept” directly into the Treasury. Simultaneously, both agencies are required to wind down their capital reserves (savings needed to cover future losses) to zero by the end of this year.
Ironically, the agencies were taken into federal conservatorship because of inadequate capital reserves.

Click here to read full article.