The New York Times reports that as the White House pushes Congress to fund its bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), it is finally getting around to scrutinizing their financial condition. Is there any chance that the inspection will NOT reveal a critical need for the Congressional bailout? No. That investigation is guaranteed to support the White House's case.

The Times reports that the Federal Reserve and the Office of the Comptroller of the Currency (OCC) will be inspecting Fannie and Freddie's books. This comes at a time when the Office of Federal Housing Oversight (OFHEO), which should have been tracking their condition, is due to be wiped out.

Meanwhile, the Times reports that Fannie and Freddie are on the hook for some big obligations. They owe $1.5 trillion; they "own or guarantee more than $5 trillion in mortgages"; and they have derivative contracts to hedge $2 trillion worth of mortgage risks. I am curious what else the Fed and the OCC will be looking for as they inspect the books. I hope they can figure out how much cash Fannie and Freddie have available to pay off their obligations over time. But why doesn't the government know this already?

U.S. home prices fell a seasonally-adjusted 1.7% in Q1 2008 -- the largest quarterly price decline in the 17-year data history of the U.S. Government's Office of Federal Housing Enterprise Oversight, government officials announced Thursday. (pdf)

Prices for single-family homes declined in 43 states, with hard-hit states California, Florida, and Nevada recording drops of 10.6%, 10.3%, and 8.1%, respectively, OFHEO said.

Prices nationally declined 1.4% in Q4 2007. OFHEO's report does not list sales prices, only percentage changes.

On the bright side, Wyoming, Utah, Montana, and Texas recorded the highest gains, of 6.3%, 5.6%, 4.9%, and 4.7%, respectively.

U.S. housing market worsens

Economist David H. Wang told BloggingStocks Thursday the OFHEO data, while not as comprehensive as U.S. Commerce Department housing data, nevertheless does not bode well for home sellers.

CNNMoney reports that McGraw-Hill Co.'s (NYSE: MHP) Standard & Poor's (S&P) forecasts the possibility of a $1 trillion bailout of Federal National Mortgage (NYSE: FNM) and Federal Home Loan Mortgage (NYSE: FRE) -- government sponsored purchasers of pools of loans which package them into securities. Specifically, S&P forecasts that a bailout of these two -- known as Fannie Mae and Freddie Mac -- would cost -- in a worst case scenario -- between $420 billion and $1.1 trillion of taxpayer's money. This would represent several times the $250 billion Savings & Loan bailout by the first President Bush.

It's a bit ironic for S&P to be issuing this report. After all, it was among the ratings agencies that contributed to the problem in the first place. As I posted last August, the ratings agencies competed for enormous fees from investment banks to put their AAA ratings on issues of mortgage-backed securities (MBS). Those AAA ratings caused naive MBS buyers to skip the kind of detailed analysis of their purchases that might have stopped the flow of dumb money into the MBS bubble that is now putting Fannie and Freddie at risk.

How did S&P arrive at this scary conclusion? Both companies are forecast to report more losses this year due to declining home prices and rising mortgage defaults. And according to Yale professor, Robert Schiller, "The real fundamental problem is real estate prices have been falling and they might fall substantially more. The Office of Federal Housing Enterprise Oversight (OFHEO) and Fannie and Freddie never considered the possibility of a massive real estate correction."

Ted Allrich is the founder of The Online Investor and author of the recently released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.

It's not all bad out there. Some stocks are doing much better with individual results carrying them higher. Others are being carried by a sea change in the industry. Here are the news and stocks that provide some of the light in the current darkness.

(please note, this column was written Wednesday, Feb. 27).

On Monday, the rumor that started the rally on Friday continued. Several banks were going to form a consortium to save the insurance company AMBAC. On top of that there was a renewed bid for Take Two by Electronics Arts, this time with a higher price tag. Take Two rejected the new offer, but it sparked a rally. The market went up over 100 points. That was on top of the almost 100 point rally from last session, one that saw a 200 point turnaround in an hour.