A recent survey found that 62 percent of Americans are against a mortgage bailout. Most people want to see borrowers and lenders work out their own problems.

Unfortunately, our government has other ideas. Policymakers have very carefully orchestrated a shadow mortgage bailout.

FHLB Loans

Securities were key sources of money during the housing boom. Now that investors have stopped buying, many institutions have been forced to seek out alternative sources of mortgage funding.

A number of banks have turned to the Federal Home Loan Bank (FHLB) system. The 12 FHLBs are cooperatives first created during the Great Depression to boost mortgage lending and revive the struggling housing market.

In August and September, lenders borrowed an unprecedented amount of money. During September alone, loans made to banks from the FHLB system increased nearly 30 percent since the beginning of this year.

In order to meet the demand from lenders who were teetering on the edge of financial ruin, the FHLBs sold $143 million worth of short term debt, pushing outstanding debt up to $1.15 trillion--half of which comes due before the end of 2008.

The concern is that the FHLBs are taking on too much debt in their attempt to bail out lenders. If investors lose confidence and begin to get rid of FHLB debt (in the same way they dumped mortgage securities), one or more banks could collapse and leave taxpayers with the financial burden.

Freddie Mac and Fannie Mae

Freddie Mac and Fannie Mae are also part of the shadow bailout. The two congressionally chartered companies have been helping to provide liquidity to the marketplace by buying mortgages from lenders and using the proceeds to make even more loans.

Both companies have grown considerably since the credit crunch began. In October, 72 percent of the U.S. mortgage securities offered to investors were guaranteed by Fannie and Freddie--up from 41 percent in 2005.

Now there are rumors that the two companies are sustaining heavy losses as a result of the expansion. The rumors were essentially confirmed with the release of Fannie Mae's latest earnings report. In an obvious attempt to disguise the credit losses, the company has suddenly changed the way they disclose bad loans.

Based on the old methodology for calculating the loss ratio, Fannie Mae's annualized loss ratio is already at 14 basis points, well above the estimated 2007 loss ratio of four to six basis points.

The following graph demonstrates how dangerous and disturbing the current losses are, as well as the threat they present to taxpayers.

As of September 30, Fannie Mae had $40 billion in capital. The company also had exposure to $196 billion in Alt-A loans and $74 billion in subprime loans (loans with a FICO score under 620). Altogether, Fannie holds $2.7 trillion worth of mortgages. If a high percentage of the risky loans go bad - and there is no reason to think they won't - Fannie Mae could quickly lose the capital they have and be left without a financial leg to stand on.

Although neither Fannie Mae nor Freddie Mac are technically government agencies, it is a given that the government (i.e. taxpayers) would bail out both companies out if necessary. The potential cost could range into the hundreds of billions of dollars according to a recent Senate report.

The worst of it is that taxpayers shouldn't be responsible for Fannie and Freddie's portfolio. These agencies are supposed to be 'private' companies. If they were treated like other private companies were treated, they would be held by the same rules and receive less support.

As it stands, many policymakers are pushing for even less regulation for Fannie and Freddie. Federal Reserve Chairman Ben Bernanke is suggesting raising loan limits from $417,000 to $1 million. Others are pushing for regulators to lift capital and portfolio caps--the only two factors currently keeping the companies in check.