Remember when we were young and innocent and worried about mundane things such as what in the world would happen if Fannie or Freddie failed. We were assured that could never ever happen and of course if something went wrong it would all be worked out with minimal cost to the taxpayer. Seems like ages ago but really it was, oh around last July when this was a big deal.

On Wednesday, no one blinked when President Obama said that part of his plan to put $200 billion more into each one of them and let them start blowing up their balance sheets. I haven’t heard exactly how all of this shakes out in terms of the rump piece of the company that’s been left for the shareholders. Keep in mind that we left them with 20% of the company so we don’t have to put their debt on the government’s balance sheet but there are some developments that would seem to indicate that little bit of financial engineering might not last.

Housing Wire is reporting today that some of the biggest buyers of Fannie and Freddie’s debt-Asian financial institutions and central banks-are not only not buying but are in fact net sellers. Here’s what’s rankling them:

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: 3.79 -3.56%), 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 Fridaythat “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.”

So why not just guarantee the debt since we all know we’re on the hook for it anyway? Well for one thing, it would seriously balloon the government’s balance sheet. F&F owe a lot of money. Prowling around on the Web I found an article on Econobrowser dating back to July that does a good job of outlining the amount of money both are on the hook for. Their combined debt is around $1.5 trillion but that’s just the beginning.

These balance sheets leave out the mortgage-backed securities that the enterprises created and sold directly to outside investors, for which the enterprises have issued off-balance-sheet guarantees for payment. The OFHEO 2008 Annual Report to Congress states that Freddie had sold $1,381.9 billion in MBS and Fannie $2,118.9 billion. If you add together the mortgages retained outright by Fannie and Freddie (either as whole loans or MBS) plus the MBS that they have sold to others and offer a guarantee for payment, the OFHEO calculates a total “book of business” for the two enterprises of $4,934.4 billion as of the end of 2007, slightly less than the total publicly held debt of the U.S. government.

Now you can see the extent of the problem. An explicit guarantee is going to bring the two on balance sheet which would more or less double the reported debt of the country. That may only be a recognition of reality but it does have consequences. As Housing Wire points out, in April of last year S&P said that they were concerned about the contingent risk that the two represented and said that if their debt were to become U.S. government debt it could imperil the credit rating of the country. That aside, there is a practical limit as to how much debt the U.S. may show on its balance sheet. At some point the sheer size will cause investors to demand higher rates on government debt.

The wild card in all of the programs that we’re rolling out is the willingness of the rest of the world to keep buying our debt. I suspect they will since they don’t have a lot of alternatives and in the end a return to prosperity for us is vitally important to their future. That being said, they appear to want a direct claim on the U.S. which means we have to own up to how much we really owe. In the long run that might hurt our pocketbook more than a little bit.

P.S. If you have time read the entire Econobrowser article. It’s remarkable how much has changed in such a short time. Based on what’s transpired it seems naive. In a way it makes me wonder just how far detached from the reality of our future fate we might now be.