My old friend Bill Burnham has an outstanding post up explaining just how Fannie Mae and Freddie Mac ended up in their current pickle. I highly recommend checking it out.
"Fannie’s drive to lower underwriting standards had created a pool of mortgage debt with a much higher level of embedded moral hazard risk as well as good old fashioned credit risk. Fannie’s purchases of mortgage securities were so large that it was getting increasingly difficult to feed the golden goose enough food. On top of all that, with hundreds of billions of dollars of assets and liabilities to manage, Fannie's ALM strategies had become more and more complex and some of its bread and butter strategies started to become less profitable as the sheer weight of over half a trillion dollars of debt started to compress spreads (it would seem that even an implicit government guarantee has its limits).
It is no coincidence that the current mortgage crisis started in the so-called sub-prime market as that’s the mortgage market with the lowest credit quality and underwriting standards, however as the mortgage crisis has spread it has become increasingly clear that the traditional conventional, conforming mortgage market, long the domain of Fannie Mae and Freddie Mac, shares many more similarities with the sub-prime market than it would like to admit. While credit and underwriting standards are clearly much higher in the conforming market, they are also undoubtedly much lower than they were 10 or 20 years ago. What’s more the two biggest insurers against loss in that market now happen to also be the biggest owners in that market thanks to 20 years of purchasing mortgages to fund their government subsidized golden gooses. Guaranteeing oneself against risk is not insurance, its an exercise in futility."