Can Fannie go bust?

From Marketwatch:

Fannie Mae could be hit hard by housing bust: Berg

The worst of Fannie Mae's regulatory troubles may be behind it, but one longtime skeptic of the mortgage giant thinks it could face bigger problems from trouble in the U.S. housing market.

Gilchrist Berg, founder of $2 billion Jacksonville, Fla.-based hedge-fund firm Water Street Capital, said in a recent letter to investors that Fannie Mae could lose $22 billion to $29 billion if, as he expects, the housing bubble bursts and foreclosures increase.
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"We are not sure the folks running the show fully embrace the risk of declining house prices," Berg wrote in the letter, a copy of which was obtained by MarketWatch. If the housing market continues to decline "a major portion of Fannie Mae's value could be wiped out." He declined to comment for this story.

Fannie Mae spokesman Alfred King said the company protects itself from housing-market volatility in many ways, including maintaining a geographically diverse book of business and focusing on mortgages that have a high percentage of equity in them.
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Fannie has traditionally specialized in higher-quality, fixed-rate mortgages, which are less vulnerable to interest-rate fluctuations and volatility in the housing market.

But the company has been investing more in subprime MBS in recent years. Subprime loans are sold to home buyers who fail to meet the strictest lending standards, so this area of the mortgage market is expected to be hit harder by any housing downturn.

Fannie and Freddie bought 25.2% of the record $272.81 billion in subprime MBS sold in the first half of 2006, according to Inside Mortgage Finance Publications, a Bethesda, Md.-based publisher that covers the home loan industry.

In 2005, Fannie and Freddie purchased 35.3% of all subprime MBS, the publication estimated. The year before, the two purchased almost 44% of all subprime MBS sold.
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Given those recent moves, Berg said it's not implausible that 15% of Fannie's mortgage exposure is subprime.

If a housing slowdown causes subprime foreclosure loss rates to rise to between 6% and 8%, Fannie could lose $22 billion to $29 billion, Berg estimated in his letter.

That's more than half of the roughly $40 billion in capital that Fannie had at the end of March, according to Ofheo.

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