The bookkeeping time bomb being probed at Freddie Mac could yank the rug out from under our booming housing market - the last leg holding up the economy.
Economists and analysts fear that the scandal could trigger a domino effect in our banking system that could push historically low mortgage rates - now down to 41/2 percent - soaring in the weeks ahead.
"If rates rise, the housing bubble will pop," said mortgage expert Martha Kaufman, chief operating officer of Prudential's Preferred Empire, one of New York's top 10 mortgage brokers.
"It's all still a very wait-and-see situation."
Wall Street reacted immediately to news of the Freddie Mac shakeup, and sent housing and banking stocks tumbling. "There's a lot of smoke here, and many are convinced there's fire. But no one knows exactly what's involved yet," said portfolio manager Bill King.
"It could take an army of wizards to sort out all the exposure."
Freddie Mac is involved in financing one of every six home mortgages in the United States. Freddie Mac and its sister agency, Fannie Mae, own or guar- antee $3.1 trillion in mortgages.
The two agencies - created by the federal government but operated quietly as private enterprises with stockholders - funnel cheap federal money to banks to buy up or guarantee trillions in mortgages that banks issue to homebuyers.
The two agencies then create securities - backed by homeowners' mortgage payments - which are sold to Wall Street for clients ranging from pension funds to rich investors.
"Freddie Mac is an important bridge for housing but any real questions about [its operations] raises fear and the risk premium," said economist Don Straszheim.
The higher the risk, the higher the interest rate charged across the board for all parties in the chain.
"It's still too early to panic - we don't know how broad or long-term this could be," he said.
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