By ANDREW JEFFERY

This post first appeared on Minyanville.

$100 billion just isn’t what it used to be.

Over the weekend, Freddie Mac (FRE) requested a second draw on its Treasury Department credit facility, saying $30-35 billion would suffice to keep its net worth above zero, thank you very much. After taking $14 billion in the third quarter of last year, Freddie has now chewed through almost half its $100 billion taxpayer-provided safety net in just 5 months.

According to Bloomberg, Freddie’s fourth -quarter operating losses triggered the need for additional funds, as its massive mortgage portfolio continues to sour. Analysts expect Freddie’s sister company, Fannie Mae (FNM), to request a similar draw when it announces fourth-quarter results in February.

As one analyst told Bloomberg, “[Fannie and Freddie’s] losses are going to be much higher than anyone anticipated. The more and more that people are digging into these portfolios, they’re finding out the more and more these guys were doing subprime and Alt-A loans and classifying them as prime.”

Defaults on prime mortgages, which are supposed to be given out to borrowers with good credit and stable jobs, are now increasing at a faster rate than the subprime loans that get so much headline play. According to the latest Mortgage Bankers Association Delinquency Survey, 2.87% of all prime loans were delinquent in the third quarter of last year, up 85% from the same period a year ago.

Keep in mind those figures are through September 2008 and don’t include the abysmal economic conditions of the past 4 months. And as layoffs mount and the economy continues to contract, the previously well-to-do are facing the same economic hardships those “subprime” people have been dealing with for almost 2 years.

Fannie and Freddie, despite not technically being involved in subprime lending, drove industry trends, and, in many ways, set precedents followed by the rest of the mortgage industry. Their drive to automate the loan underwriting process created massive opportunities for fraud. Both savvy and ignorant originators easily duped the system, jamming subprime borrowers into prime loans, which neatly showed up on bank balance sheets as AAA-rated assets.

The sieve-like automated systems were adopted by other big lenders, such as Countrywide, Washington Mutual, Bear Stearns, Lehman Brothers, IndyMac and Wachovia.

Now that none of those firms exist, loans originated under the guise of “prime” are turning out to be anything but. Bank of America (BAC), JPMorgan (JPM) and Wells Fargo (WFC), heretofore the strongest banks in the country, who absorbed many of those defunct lenders, are now faced with mounting losses on loans they thought were of the highest quality.

As I noted about this time last year, while everyone was so focused on subprime, prime mortgages — a market about 4 times as large — quietly presented a far bigger threat to the financial system. Now, as the government has bailed out 2 of the 4 remaining big American banks, those loans threaten the federal balance sheet.

Where’s TARP 2 when you need it?

This post first appeared on Minyanville.

Despite the Armageddon-esque financial turmoil of recent weeks, one thing about America hasn’t changed: If you really want someone to do something, sue them.

They lined up in droves: Cities, counties and states sued the pants off Countrywide for its shady lending practices. California, Illinois and Florida all alleged the lender fleeced American homeowners, jamming them into loans they had no hopes of repaying.

Now, Bank of America (BAC), who purchased the troubled California-based lender earlier this year, is stuck cleaning up the mess. Earlier this month, the bank agreed to pay more than $8 billion to settle lawsuits filed against Countrywide. Friday, the Los Angeles Times ran through the details of its plan to help as many as 395,000 troubled borrowers:

• Only owner-occupiers (not investors) with subprime or option ARMs qualify for assistance
• Interest rates may be reset as low as 2.5%
• Prepayment penalties and late fees will be waived
• Upside-down borrowers may have principal reduced
• Borrowers who lost their homes (or don’t qualify for assistance) will receive an average of $2,000.

Notably, Bank of America managed to get most investors who bought Countrywide’s mortgage-backed securities to agree to the plan. Holders of these assets have previously balked at such sweeping plans, since modifications usually lower a loan’s cash flow and decrease the value of securities behind it.

Efforts to get lenders to work aggressively with borrowers to avoid foreclosure have been largely ineffective. To be sure, there has been progress, but it’s fallen mightily short of promises the Bush Administration made last year when it announced its pilot program, HOPE NOW.

The aggressive plan, which Congressman Barney Frank, capitalism’s new public enemy number-one, called “the first truly comprehensive plan we’ve seen from the private sector,” could set the stage for a deluge of lawsuits.

The precedent has now been set: The way to stop foreclosures is to start suing banks.

I remember sitting in a meeting in early 2006, when a German bank that had lent our mortgage finance firm a few hundred million dollars asked why we didn’t get into the lucrative option-ARM market. The response: “We don’t want to touch those things. They’re a class action lawsuit waiting to happen.”

Indeed.

Other than Countrywide, the biggest writers of option ARMs during the boom were Washington Mutual, Bear Stearns and Wachovia. Not a single one remains independent.

The proud new owners of these banks, JPMorgan (JPM) (WaMu and Bear) and Wells Fargo (WFC) (via Wachovia) would do well to beef up their legal departments.