Since twin housing finance giants Fannie Mae (FNM) and Freddie Mac (FRE) were placed under conservatorship last year, Federal Housing Finance Agency director James Lockhart has famously (infamously?) intoned that both GSEs now carry an "effective" guarantee on both their debt and mortgage securities. But "effective" is clearly not the same thing as an explicit guarantee, despite wrangling by U.S. policymakers and other administration officials designed to coax overseas investors back into the agency MBS markets. At least not in the eyes of the all-important Asian financial markets, where investors have been voting with their pocketbooks for the better part of six months now -- and demonstrating beyond pale just how comparatively (in)valuable they really see an "effective" guarantee of GSE bonds to be. December TIC data, released earlier this week, shows that overseas investors were net sellers of $37.5 billion in agency bonds -- including agency MBS -- during December, bringing cumulative net selling of agency bonds by overseas investors to $170 billion in the second half of last year. It's no surprise that the Fed has had to step into the agency MBS markets in a big way, then, and has been swimming upstream against softening demand (to steal a phrase from dear colleague Linda Lowell). According to analysts at Bank of America (BAC), Japan and Korea were net sellers of $6.5 billion in agency bonds during December alone, while China was a net seller to the tune of $1.2 billion in Dec. 2008. Hideo Shimomura, chief fund investor in Tokyo for Mitsubishi UFJ Asset Management Co., told Bloomberg Friday that "there is still a concern that there is no guarantee" of agency debt and securities, even after the Obama administration has said it will sink as much as $400 billion in increased funding to backstop the operations of the GSEs, as part of its Homeowner Affordability and Stability Plan, or HASP. “Looking at the risk, [GSE bonds are] not so attractive,” he told the news service. “We need a guarantee before we’ll buy.” Part of that problem is the fact that GSE debt is now effectively competing against debt issued by commercial banks under the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program; such debt is backed directly by the government, without the nagging questions that inevitably come with divining the real meaning of an "effective" guarantee. All of which should underscore a big challenge for anyone and everyone in the mortgage market that is yet left standing: the one still-functioning market that is out there is now facing some problems of its own. And those problems go well beyond figuring out how to simply keep mortgage rates for borrowers at a desirable level, although that's certainly part of the equation here. “Overseas investors are looking for the full-faith-and-credit clarification,” Laurie Goodman, senior managing director at Austin, Texas-based Amherst Securities Group LP, told Bloomberg in an interview. Goodman is a former head of fixed- income research at UBS AG. But extending such a full-faith and credit guarantee would clearly come with its own dangers -- risks that a new Obama administration likely is well aware of as it now weighs its options for mortgages and housing. For one thing, such a move would instantly nearly double the U.S.' debt. And Standard & Poor's Ratings Services has warned as far back as April 2008 that nationalizing the GSEs could come at the cost of the U.S.' own sterling sovereign credit rating. “We believe [the GSEs] pose large contingent fiscal risks that recent policy decisions aimed at supporting the U.S. mortgage market have made even larger,” S&P analysts wrote in the report last year. “If these risks were to translate into increased government debt, they could even hurt the U.S.’s credit standing.” In a deep and prolonged recession, S&P had estimated last year that the cost of nationalizing the GSEs, together with loans and guarantees extended by explicitly-guaranteed U.S. government agencies, yielded a potential fiscal cost to the government of up to 10 percent of GDP. At that time, John Chambers, chairman of S&P's sovereign rating committee, sought to diffuse concern by noting that the agency was not predicting a deep or prolonged recession. Let's just say I'd expect S&P's stance has changed since last April. But perhaps all the doom-and-gloom sort of concern for the agency MBS market is unwarranted. After all, Freddie was able to complete a record $10 billion, three-year note sale this week -- at yields slightly above a similar government-guaranteed issue by JPMorgan Chase & Co. (JPM), as Bloomberg notes. Freddie Mac treasurer Peter Federico used the successful issuance as a chance to suggest that the worry over Asian sell-off of agency bonds is overstated, according to Bloomberg. “There are a couple of institutions who continue to sell agency debt,” he told the news agency. “I think their reasoning for doing that is not related to their comfort with our credit." But Asian investors purchased only 12 percent of the issue, with the rest going to North American buyers -- and does anyone feel like betting on just who from North America was busy picking up the majority of the new bonds? Write to Paul Jackson at Disclosure: The author held various put option contracts on JPM when this story was published, and held no other relevant investment positions. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.