Is that some kind of sick joke?

The US is turning into a banana republic.

How can this be legally permitted under the accounting rules?

Here’s the short version. In Depression Fannie was created as a government agency to borrow on financial markets and then buy government insured mortgages. Liquidity in mortgage market (which private sector was not providing) increased availability of mortgages to public.

60s, expensive borrowing, meant that Fannie was losing money for government. Then privatized. Freddie created as competition. However, GSE status means that agency debt is acceptable as backing for Federal Reserve notes. Therefore even in the old days agency debt could be held on the Fed’s balance sheet, though in practice not much was held.

70’s Fannie/Freddie start buying mortgages without government guarantee, create mortgage securitization business.

In short what was a government business of borrowing short to lend ultra long (which in the 30s wasn’t a business even banks would get into) became a privatized business of doing same — with implicit government support because the Fed accepts agency paper as collateral for open market repos.

As we all know, however, the Fed’s balance sheet now includes a lot of things that could lose it money.

And of course the housing market is too big for the government to support. We’ve heard all the criteria for triage in terms of who was an honest borrower, who was miseld by lenders, who might be able to afford a loan if the principal were reduced to some reasonable sum. I offer one more for discussion: How about at least exploring the possibility of preferring to save homeowners who are located closer to urban cores and transport hubs, in order to encourage energy efficiency? We can no longer afford to subsidize suburban sprawl or exurban development with oil over $120. It’s high time we started looking at the energy and envirnomental impact of our economic policies in a more systematic fashion.