It is said the most dangerous place to be in Washington is between a politician and a TV camera. While that may be so, the rush to the cameras is nothing compared with the stampede of commentary and analysis on the crisis enveloping Fannie Mae (FNM) and Freddie Mac (FRE).

A lot of what’s been written has been hyperbole and confusing, compounded by politics. Some of the actions announced by public officials appear inconsistent but all are designed to get to the root of the problem: a perception that the two mortgage giants are in trouble.

At the root of the “problem” is the belief Fannie Mae (née the Federal National Mortgage Association) and Freddie Mac (née Federal Home Loan Mortgage Corporation) will not have the funds to meet bond obligations and the liquidity crunch could cause credit to seize. That’s important because Freddie and Fannie provide cash to mortgage lenders and their unique status as government sponsored enterprises (chartered by the Federal government) carries an implied guarantee that the Federal government will be there to back bonds issued by either agency.

The implicit guarantee became an explicit one with weekend statements by Treasury Secretary Henry Paulson and the move by the Federal Reserve to give Fannie and Freddie access to the Fed’s discount window for funds. At the same time though, Sen. Christopher Dodd [D-Conn.], chair of the Senate Banking Committee, dismissed suggestions the agencies were facing any cash crunch (while at the same pushing legislation to prop up the two agencies).

Though not direct mortgage lenders, Freddie and Fannie are critical elements in the mortgage process. They purchase mortgages from lenders, providing those lenders with the cash to make additional loans. Because they buy loans, they can set lending standards and in that way they contributed to the mortgage meltdown -- not because they bought loans made to subprime borrowers, but because they permitted loans with virtually no down payment.

But just as they may have contributed to the mortgage problem, they were considered part of the solution. Both Fannie and Freddie were limited in the size of loans they could purchase, a cap that was lifted earlier this year in an early effort to stem the rising tide of foreclosures. As such, their stability is critical to helping to solve the nation’s housing problems and for the smooth functioning of mortgage and housing markets in the future.

There is some fear attached to the Fannie-Freddie concerns -- misplaced fear. The struggles facing the two agencies, unchecked, could affect new loans but won’t immediately affect homeowners or their mortgages. Interest rates on existing fixed rate loans will not go up, monthly payments won’t change beyond normal adjustments (to cover increases in property taxes or homeowners insurance or, for adjustable rate loans, interest rates).

Freddie and Fannie can cause ulcers for politicians of both ends of the spectrum. Indeed, the two giants symbolize a marriage – perhaps troubled – of liberal and conservative government philosophies. For conservatives who believe the free market should govern, investors benefit when the companies are well-run; for liberals who believe the government should be there to support basic need, the implicit guarantee was there to keep a lid on the cost of owning a home.

From the view of an economist, the two entities violate some basic rules with terms such as “moral hazard” and “costs and incentives” frequently tossed around and sprinkled into commentary.

"Moral hazard" is the term used to describe the tendency of individuals or institutions to increase the likelihood or size of a risk if they believe they will be protected against loss. In the case of the two government entities, the loss will be borne by the government and because they are both investor-owned, the profits go to the benefit of stockholders. Thus “cost and incentive,” another economic term, comes in to play. There may be an incentive for Fannie and Freddie to buy risky loans (profits), but there is very little cost (losses) if those loans go bad.

That said, Freddie and Fannie, because of their up-to-now implicit government support, keep the cost of homeownership lower than it otherwise might be in two ways. They can borrow more cheaply than other providers of mortgage cash, passing the lower cost of funds on to mortgage borrowers and because of their size can standardize mortgage procedures. Indeed, there is a standard mortgage application form used by major mortgage lenders to collect basic information on borrowers – even for loans which Fannie and Freddie cannot buy – and both have developed variations of automated systems to evaluate borrowers, reducing the cost of processing applications.

The mortgage process can be scary to some, but it is relatively simple from a financial standpoint. Banks make mortgage loans and then sell them to entities such as Fannie or Freddie, which bundle them together and sell them as securities to investors. Freddie and Fannie use the proceeds of the sales to buy more loans allowing lenders to keep providing cash to borrowers.

Thus it was no surprise that Paulson trekked to Capitol Hill Tuesday to press for legislation to support Freddie and Fannie. Paulson chose his words carefully describing them as “working through this challenging period.”

Fannie and Freddie, he said, “now touch 70 percent of new mortgages and represent the only functioning secondary mortgage market.” They are, he added “central to the availability of housing finance, which will determine the pace at which we emerge from this housing correction.”

What Paulson propose though was a hybrid solution to support the debt and other securities issued by Fannie and Freddie “held by financial institutions around the world.” It would make the Treasury both a lender to and potentially an investor in the two agencies.

His proposal was not greeted with universal support with Sen. Jim Bunning [R-Ky.] leading the opposition to the proposals.

The concern of critics is the Treasury proposal involves public money but protects Fannie and Freddie shareholders. They argue it continues a system in which profits are private but losses are public.

A larger question might be whether the Treasury plan is necessary. Fannie has about $800 billion outstanding debt and Freddie about $740 billion. Together, they have loans valued at more than $5 trillion or more than three times the amount of their debt. The support plans thus are designed to deal not so much with reality as with perception.

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president at Washington Mutual, where he was manager of economic analysis and research. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He has a degree in Economics from the Wharton School of the University of Pennsylvania.