Government is not always the solution

Sometimes, it's the problem. A very, very big problem:

The extent of the problem is likely to come to the fore on Tuesday, when a former Fannie Mae executive and several outside experts are scheduled to testify before the House oversight committee about the company’s condition.

Of particular concern is how Fannie Mae accounts for subprime mortgages and so-called Alt-A home loans, which are technically a rung above subprime. Some critics say that Fannie Mae defines these loans loosely, which could expose the company to new, gaping losses.

Among those scheduled to testify on Tuesday are Edward J. Pinto, a former credit officer at Fannie Mae, and Charles W. Calomiris, a finance professor at Columbia who has studied the government-sponsored enterprises, or G.S.E.’s. “Fannie has a vast universe of junk loans,” Mr. Pinto said.

Peter J. Wallison, a fellow at the American Enterprise Institute and a longtime critic of Fannie Mae and Freddie Mac who issued a critical report of Fannie Mae with Mr. Calomiris in September, said Fannie Mae’s vague definitions for risky mortgages had masked its potential losses.

“Fannie is a much bigger and deeper hole than anybody has yet realized,” Mr. Wallison, a former Treasury Department counsel, said.

Fannie Mae lost $29 billion in the third quarter. Most of that deficit — more than $21 billion — reflected write-downs of deferred tax assets, rather than ailing mortgages. Fannie said last month that it was bracing for additional losses and might need more than the $100 billion that the government had pledged.

But in an interview, Mr. Wallison said that Fannie Mae’s losses could rise at least $100 billion because of “junk loans” that are obscured on its books.

Subprime loans, which are often defined as loans made to borrowers with FICO credit scores below 660, accounted for $8.7 billion, or about 0.3 percent, of Fannie Mae’s total holdings of single-family mortgages, according to its third-quarter financial statement. But Fannie uses its own definition for subprime loans and does not disclose some of these definitions.