Fannie and Freddie are like "cement that holds the American housing markets together".

The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.

Fannie Mae and Freddie Mac are not banks. But like most financial companies, they stand or fall on public trust -- and right now, fewer and fewer people are confident that the two government-chartered mortgage-finance companies can survive on their own.

Result:

• The crisis that has enveloped the entire U.S. financial system has visibly worsened. The woes of Fannie and Freddie burst into public view on Thursday, July 10, in a front-page. Wall Street Journal story that revealed the government had begun contingency planning, were the two publicly traded companies to fail. Freddie's shares fell 22% and Fannie's dropped 13% that day on the news.
• Fannie and Freddie are crucial to the smooth flow of everyday American life. They are the cement that holds the nation's housing markets together. The companies buy home loans from banks that issue them, repackage those loans as bonds, and either hold them as assets or sell them to the public.
• Roughly 70% of U.S. home mortgages pass through the hands of Fannie and Freddie. Together, they own or guarantee $5.2 trillion in mortgages. Without Fannie and Freddie, it could soon become all but impossible to buy or sell a home.
• But to continue to provide this service, they must be able to borrow cheaply, and that window may be closing as the financial community loses faith in their ability to continue as going concerns. The cost of borrowing has gone up. On July 10, their bonds yielded 0.78 percentage point more than did comparable Treasuries -- double the gap of a year ago.
• In addition, the two entities will require heavy infusions of capital. At last word, just 1.22% of Fannie's single-family loans that it owns or guarantees were 90 days or more overdue. Freddie's number was 0.81%.
• Still, the companies have reported a combined loss of $11 billion for the nine months through March 31 because of foreclosures on mortgages they own, plus provisions for future losses. And this may be only a taste of what lies ahead. Moreover, their combined capital of $81 billion represents just 1.6% of the mortgages they own or guarantee.
• Big issues of stock in Fannie and Freddie are another possibility, one that would shrink the equity of current shareholders. But with their stock prices as low as they are, it's hard to see how this would raise enough needed capital.
• All along, the financial community has been sanguine about the worsening affairs of Fannie Mae and Freddie Mac because it assumed that if push came to shove, the government that set up these entities would come to their rescue.
• In the worst case, that may be what happens, in the form of a conservatorship. Under a 1992 law, for a conservatorship to occur, the companies' chief regulator, James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight, would need to conclude that Fannie, Freddie or both are "critically undercapitalized."
• A conservator would have the power to run the companies -- but not the authority to shut them down. According to the New York Times, the shares of the companies would become all but worthless, and losses on mortgages they hold or guarantee would be made up by the federal government.