Government-sponsored entities Fannie Mae (FNM) and Freddie Mac (FRE) are set to purchase a monthly $40 billion in under-performing mortgage bonds, according to a Bloomberg report Saturday. Fannie and Freddie, which came into conservatorship on Sept. 7, were directed in August to increase their portfolios of mortgage-backed securities. But buying up under-performing and subprime RMBS? The move incensed more than a few of HW's key sources. "So this is why they wiped out shareholders in the GSEs? So the government could use the GSEs to take on toxic mortgage debt?" asked one source, an ABS/MBS analyst that asked to remain anonymous. "The private GSEs would have stayed far, far away from this market, because all it will do is pass losses on to taxpayers via the new GSE conduit." The Federal Housing Finance Agency urged the GSEs to purchase bonds in a separate move from the $700 billion Troubled Asset Relief Program, through which the Department of the Treasury plans to purchase assets from financial institutions, according to Bloomberg. "For now, they're under conservatorship and they have to be used to keep the flow of capital going to the housing market,'' former Treasury secretary Lawrence Summers told Bloomberg. "They're important to maintaining the flow of government finance'' and need to be used actively, he said. The companies have reported they might sell bad assets to the Treasury Department as part of the troubled asset relief program. Bad mortgages account for 2 to 4 percent of the entities’ total $12 trillion of outstanding mortgage debt, Federal Housing Finance Agency director James Lockhart told Reuters. Fannie Mae also announced last week its partnership with the Federal Home Loan Bank of Chicago to buy 15- and 30-year fixed-rate mortgages. The move indicated how federal officials intended to wield their power over both GSEs in the wake of placing both Fannie and Freddie into conservatorship last month; administration officials indcated at the time they would seek to use both GSEs to stabilize a wobbling U.S. mortgage market. With contributions from Paul Jackson. Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade. Editor’s Note: To contact the reporter on this story, email diana.golobay@housingwire.com.