Fannie Mae-No Politics (FNMA)

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As for Fannie and Freddie, U.S. taxpayers have already spent $134 billion to ensure that holders of their debt and asset-backed securities are paid in full.

A more sophisticated view of how China could face losses on its Fannie and Freddie holdings was offered separately by a popular Chinese economist on Thursday. Lu Zhengwei, a senior economist at China’s Industrial Bank Co., said in a report that the commitment by the Obama administration to pay back holders of the two mortgage giants’ securities amounts to an “empty check” without the support of the U.S. Congress.

“Looking at the current political situation in the U.S., for the U.S. congress to give a clear guarantee on this issue is almost impossible,” Lu said.

Lu said an outright default on the securities remains unlikely, but that the end of the Federal Reserve program of quantitative easing could cause the price of Fannie and Freddie securities to fall as interest rates rise on various debt instruments. He suggested that China sell its holdings of the securities.

It is doubtful that the U.S. government will allow a default on these securities, but Lu’s suggestion that Congress might balk at making the payments is at least plausible.

China has never disclosed the size of its holdings of Fannie and Freddie securities, but according to the U.S Treasury’s report on foreign holdings of U.S. securities, China held $454 billion of long-term U.S. agency debt as of June 30, 2009. That includes $358 billion of “asset backed securities…backed primarily by home mortgages,” and $96 billion of other long-term agency debt.

The bulk of those holdings are likely in Fannie and Freddie bonds and securities, though it also includes debt from other U.S. government agencies such as the Government National Mortgage Association.

According to separate figures from the U.S. Treasury, China has been steadily selling its holdings of agency securities since mid-2008. It sold a net $24.67 billion worth of agency securities it 2009, and $27.35 billion in the first 11 months of 2010, according to the data.

China’s sell off of Fannie and Freddie securities in 2008 was widely credited with pushing up mortgage rates in the U.S. at time Washington was struggling to revive housing sales. Weak demand for such debt from China and other foreign investors helped prompt the Federal Reserve to announce in late 2008 that it would take the step of buying up to $600 billion in debt from Fannie, Freddie and two other U.S. government-related mortgage businesses.http://blogs.wsj.com/chinarealtime/2011/02/12/much-ado-in-china-about-fannie-and-freddie/