By GRETCHEN MORGENSON
Published: October 3, 2004

IT is literally a trillion-dollar question: What will a humbled, reined-in Fannie Mae, the nation’s biggest mortgage provider, mean to the economy, the financial markets, interest rates and housing in America?

Since regulators disclosed evidence of widespread accounting improprieties at the company, which carries almost $1 trillion in mortgages on its books, the response from the financial markets has been surprisingly muted. To be sure, Fannie Mae’s stock has lost 14 percent of its value, but its debt securities have held fairly steady and the pools of mortgages it sells to investors have continued to attract buyers.

Even if Fannie Mae’s troubles are eventually worked out, there may be other, potentially nasty reverberations from the company’s weakened position. These include a possible hit to the dollar if foreign investors, who have bought so much of the company’s debt, become alarmed by the accounting problems and sell.

James A. Bianco of Bianco Research in Chicago, said he thinks foreigners might well cut back on their Fannie Mae debt holdings, as they seem to have done when Freddie Mac, another government-sponsored enterprise in the mortgage business, had its own accounting problems last year. ”If Freddie spooked foreigners, the Fannie scandal will exacerbate the trend,” he said.

In addition, Fannie Mae’s woes could work against the Federal Reserve Board as it moves to keep inflation in check by raising interest rates. If the company, under heightened scrutiny, decides that it must manage its interest rate risk more aggressively, it would have to buy huge amounts of Treasury securities. Doing so would push rates down further, creating a vicious cycle in which more homeowners refinance their mortgages, leaving Fannie Mae with a larger mismatch between the longer-term debt they have issued to buy the mortgages and the shorter-lived mortgages themselves.

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