Debt investors barely blinked Friday at Fannie Mae's (FNM) announcements that its 2008 loss was nearly $60 billion and that expects to see more red ink this year.

The larger-than-expected loss wipes out 17 years of profit and may be the death knell to any hopes that the mortgage-finance company will emerge from government control any time soon.

Risk premiums on mortgage bonds guaranteed by Fannie and its sibling Freddie Mac (FNM), which is also expected to post steep losses, held in the same 190-basis-point range during the day, as they have all week.

This stands in stark contrast to the volatility injected into the stock and bond market after Citigroup Inc. (C) Friday took steps to convert preferred shares - including those held by the U.S. government - into common equity as it seeks to shore up its capital. The reason is agency-debt investors take comfort in the fact that Fannie and Freddie are firmly in the government's hands and that they have a significant role in its initiatives to stablize housing. Stock investors, meanwhile, have been sidelined since the government took over Fannie and Freddie last year. Their stock trades around 43 cents on the dollar.

"Investors, in general, view Fannie and Freddie as firmly under government control and expect that if any capital needs arise, the government will take care of it," said Mahesh Swaminathan, mortgage strategist with Credit Suisse. "Nobody expects Fannie/Freddie to be full-fledged private companies any time soon," he said.

Fannie and Freddie were placed in conservatorship in September.

The U.S. Treasury's extension and expansion of its line of preferred equity credit to $200 billion from $100 billion last week is viewed as further evidence of the government's support.

Fannie said it expects to tap into these funds in the coming quarters as "market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, which is likely to cause further reductions in our net worth."

The perception of stronger government ties also is a big reason why the housing agencies have had little difficulty raising funds. Investors queued up this week to buy Fannie's record $15 billion debt offering.

This puts a heavy burden on the Obama administration to make good these market expectations. The government remains reluctant to completely take over the companies.

"But the burden nationalizing the two companies would put on the national debt, and the ultimate direction of rates make it a tough option," said Gary Greenberg, a senior vice president and mortgage strategist at Payden & Rygel, a Los Angeles-based investor in agency mortgage-backed securities.

The administration did not follow the Congressional Budget Office's suggestion that the two enterprises be added to the current federal budget.

If anything, the government bought more time to resolve these issues by pushing the deadline by which Fannie and Freddie should start shrinking their portfolios to 2010, Swaminathan of Credit Suisse said.

"There is the possibility that if these companies get to manageable sizes and are no longer too big to fail, then they may not wind up nationalizing them," Greenberg said.

 
    -By Prabha Natarajan, Dow Jones Newswires, 201-938-5071; prabha.natarajan@dowjones.com