(FORTUNE Magazine) – TIRED OF worrying about America's budget deficit? Now you can start worrying about the vast sums that are not on the budget. Uncle Sam's off-budget guarantees will climb from $2.1 trillion in 1980 to nearly $5 trillion next year, more than twice the size of the national debt. You can take small comfort in the fact that these are contingent obligations, not actual loans, so taxpayers should have to pick up only a small percentage of that massive tab. Still, for the past few years that percentage has been rising alarmingly. Between now and 1992, the U.S. government will have to spend at least $20 billion on loan and deposit guarantees that have already gone bad. Assume a less rosy economic scenario than the Bush Administration does and those hidden costs soar. Factor in a serious recession, and you're staring at a ticking time bomb. Warns Texas Democrat J.J. ''Jake'' Pickle, chairman of the oversight subcommittee of the House Ways and Means Committee: ''We surely must accept that these off-budget liabilities can have very sudden and profound on- budget consequences.'' That's not a message many folks in Washington want to hear. Not a penny of that $20 billion in losses appears in official budget projections. Indeed, to maintain the pretense that they are hitting the deficit reduction targets set by the Gramm-Rudman-Hollings law, Congress and the White House have been busily conniving to shove even more spending off-budget. That's not only disingenuous, it's dangerous. Remember the S&L mess? That $160 billion disaster crawled out of this same murky swamp of federal credit and loan guarantee programs. Recently there have been a number of smaller fiascos, where poor accounting and bad management combined to cause an off-budget venture to suddenly gush budgetary red ink. -- The Department of Housing and Urban Development (HUD) insures some $303 billion of mortgages for low- and middle-income people through its Federal Housing Authority (FHA). After ordering reserves to cover $1.2 billion of bad loans last year, the General Accounting Office discovered in late September that the FHA's losses had jumped to $4.2 billion in fiscal 1988. With 50,000 foreclosed homes on its books and the percentage of seriously delinquent mortgages twice as high as ten years ago, the FHA seems certain to transform nearly $5 billion of off-budget guarantees into deeper federal budget deficits over the next few years. -- The sickest federal direct-loan program is the Farmers Home Administration (FmHA), which lends mortgage money to folks in rural areas. Its outstanding loans peaked at more than $60 billion in the mid-1980s, and by 1987, 63% were in default. Losses over the next several years are expected to reach $20 billion. Since direct loans appear on the budget, the FmHA in the mid-1980s began switching from making loans to individuals to issuing guarantees to private lenders. That way it can stay in business without asking the White House for more money. But a new study by the Government Accounting Office concludes that roughly one-third of these off-budget guaranteed loans will sour in the next few years -- a loss rate only slightly lower than the FmHA was experiencing on its direct loans. The potential on-budget cost could reach $1 billion annually. -- Recently government auditors predicted that the Veterans Administration, which runs a $150 billion mortgage-guarantee program similar to the FHA's, would need a $450 million infusion to offset losses over the next year. Defaults in the guaranteed student loan program, which insures $52 billion in loans, are also running at an estimated 4% annual rate. There's another $2 billion a year that ought to be anticipated in the budget -- but isn't. -- In June the Guardian Bank of Hempstead, Long Island, and an affiliated mortgage company went belly-up. Though only the 120th-largest bank in New York State, Guardian had carved out a position as the country's fifth-biggest issuer of so-called Ginnie Mae securities. These are packages of residential mortgages issued by banks and savings and loans and backed with the ''full faith and credit'' of the U.S. through the Government National Mortgage Association (hence, ''Ginnie Mae''). Of the $360 billion in Ginnie Maes outstanding, Guardian, with assets of just $420 million, had underwritten some $7 billion. Based on its investigation, the Justice Department alleges that Guardian falsely withheld payment to investors in the mortgage securities and that its owner, Louis Bernstein, engaged in ''self-dealing and misapplication of bank resources in funding the growth of an unsafe mortgage company.'' No indictments have been filed yet. But search warrants have been issued. A senior official at Ginnie Mae tentatively estimates his agency will have to pay between $100 million and $200 million to holders of Guardian-issued securities. A recent audit by Price Waterhouse found that Ginnie Mae has guaranteed securities issued by insolvent S&Ls -- in violation of its own rules. No one is suggesting that all off-budget programs are in trouble. Most analysts believe that Uncle Sam's biggest pool of contingent liability -- the bank and savings and loan insurance funds, which guarantee nearly $3 trillion in deposits -- is in little danger. Bank earnings and capital, which are the first line of defense against losses, have risen briskly in recent years. As for S&Ls, regulators have demanded that they boost their capital. Says FDIC Chairman William Seidman: ''Clearly the system needs better supervision and more capital, but all the trend lines are pretty good.'' Though a few academics, such as R. Dan Brumbaugh Jr. of Stanford and Robert E. Litan of the Brookings Institution, disagree, even officials at the often skeptical Federal Reserve Board side with Seidman. THE GIANT Federal National Mortgage Association (Fannie Mae) is another solid citizen. Fannie's job is to make a secondary market in mortgages, either by buying them for its own portfolio or packaging them for sale to other investors. In the early 1980s rocketing interest rates pushed its borrowing costs above the returns on its mortgage portfolio, and Fannie Mae nearly went under. Today the company boasts a dramatically improved balance sheet and turns a healthy profit. David O. Maxwell, who took over as Fannie's chief executive in 1981 and engineered the transformation, claims it would now take ''a catastrophe the likes of which was not even seen in the 1930s'' to turn Fannie into a burden on taxpayers. Nevertheless, what many policy analysts find disturbing is the sheer speed at which Fannie Mae, the Federal Home Loan Mortgage Corp. (Freddie Mac, yet another guarantor of residential mortgages), the Student Loan Marketing Assn. (Sallie Mae), and the other outfits known as ''government-sponsored enterprises'' (GSEs) are piling up liabilities. Total GSE obligations stand at roughly $800 million. During the past decade that debt has risen at an annual average rate of 21% -- nearly twice as fast as on-budget federal borrowing. ANOTHER long-term worry: Do the GSEs have enough capital? Fannie Mae especially operates on a thin base. Its current capital-to-asset ratio is respectable, at more than 5%. But HUD allows Fannie to count subordinated debt as capital, even though this is borrowed money carrying the government's implicit guarantee rather than stockholders' equity. Fannie's common equity to assets is only 2.2%, much less than the norm for banks and S&Ls. The level of capital, however, has doubled over the past four years, and Maxwell is taking steps to boost it further. You will probably not be pleased to learn that Fannie Mae is regulated by the ill-starred Department of Housing and Urban Development. Recent legislation ordained that Freddie Mac will also report to HUD. Sallie Mae has no financial regulator at all. Last spring Robert D. Reischauer, director of the Congressional Budget Office, warned Congress, ''Continuing the current policy of not measuring and controlling the risks of GSEs could lead to large, unanticipated federal outlays.'' Though the U.S. government does not officially guarantee the debt of these quasi-private organizations, the markets have always assumed that Uncle Sam would come to the rescue in a crisis. Any doubts were resolved in 1987, when a $4 billion federal bailout saved a GSE known as the Farm Credit System. So what should Washington do about off-budget debt? For one thing the government should not make the situation worse. Consider what some lawmakers propose for the FHA. That agency currently allows borrowers to put down less than 5% for a mortgage and also pays some closing costs. So the total can exceed the price of the house. That's fine as long as prices are going up. But when the housing market falls, or even slows, look out! Say that a homeowner with a $100,000 mortgage should have to sell for $102,000 two years after buying the house. Typical closing costs of about $7,650 would leave him with only $94,350 in cash. The hapless homeowner, whose mortgage has barely amortized, would be forced to come up with an extra $4,564 to pay it off. He would be sorely tempted to default, which is just what has been happening at the FHA. Enter Senators Alfonse M. D'Amato (R-New York) and Alan Cranston (D- California) with a cure that would surely worsen the disease. They propose raising the maximum mortgage the FHA can insure, from $101,250 to 95% of the median house price in an area. This would permit loans as high as $200,000 in some posh places. The Senators would also further reduce the minimum down payment. Quips Gregory T. Barmore, chief executive of General Electric's mortgage insurance subsidiary: ''It's hard to see how you make a house more affordable by lending someone more money than he can pay back.'' WOULDN'T IT MAKE more sense to get the government out of the money-lending business? If Congress believes deserving citizens cannot buy houses for lack of a down payment, giving them the money as a check or tax credit would surely be more efficient than encouraging -- and guaranteeing -- ever larger mortgages that will lead to higher defaults. Loans already on the government's books could be sold off to private financial institutions, thereby limiting taxpayers' future risks and establishing the true value of these holdings. As for the GSEs, Wall Street economist Henry Kaufman speaks for many businessmen when he advocates abolishing their current ambiguous status. Says he: ''Take the name federal away, take the name of government away, and let them flourish or perish.'' Now that a nationwide market exists for mortgages, and such corporations as Citicorp, General Motors, and General Electric are expanding into the business, creditworthy home buyers should be able to borrow even if the Mae and Mac gang were fully privatized. Mortgage rates on lower- income housing might rise slightly -- currently smaller mortgages that flow through the GSEs carry interest rates one-eighth to one-half a percentage point below those on larger loans. But here again, if a subsidy is meant to lower the borrowing costs, why not dole it out as a tax credit instead of masking that social cost with hundreds of billions in debt guarantees? Whatever its philosophical merits, however, privatization is politically a dead duck. The Reagan Administration pushed the idea hard in its early years but failed to make headway against the powerful business and congressional constituencies that like the status quo. George Bush would surely do no better. Happily, there are a host of housekeeping measures that could make the off- budget mess less messy. For starters, all off-budget programs should be forced to meet uniform accounting and auditing standards. At the Farmers Home Administration, loans granted in one year sometimes failed to show up on the following year's books. At HUD the General Accounting Office uncovered what one report calls ''very serious internal control deficiencies.'' While bankers check to see whether a borrower has previously defaulted on a loan to them before extending another, the government, astonishingly, often does not. In addition, Congress and the Administration need to stop sweeping losses from the government's loan programs under the rug. How? By changing the accounting treatment of these programs so that the costs of loan losses are estimated as the loans go bad, and money is set aside to cover them. That's something banks and other private sector lenders have long been required to do. EARLIER IN THE YEAR, Congress ordered the Treasury Department to survey the risks of the GSEs and asked the General Accounting Office to study their capital adequacy. Now Texas's Jake Pickle is holding follow-up hearings. When the results of these studies are in next year, the best reform might be one suggested by the Congressional Budget Office: Grant a single department, such as the Treasury, the power not only to collect and analyze information about the risks of the GSEs but also to issue and enforce regulations to control those risks. Congress should also stop propagating new GSEs, which are of increasingly dubious value. The latest, the Federal Agricultural Mortgage Corp. (Farmer Mac), will start packaging and selling farm loans next year, much the same way Fannie and Freddie bundle mortgages. The College Construction Loan Insurance Association (Connie Lee) will guarantee bonds issued by colleges and universities, which it estimates is a $60 billion market. Some legislators also want to boost lending to entrepreneurs by creating an agency that would buy and package small-business loans. Though it's still looking for supporters, the Venture Enhancement and Loan Development Administration for Smaller Undercapitalized Enterprises already boasts the requisite nickname -- ''Velda Sue.'' Could it be that Washington's budget accounting has gotten so creative that nobody can keep track of what's in or out of the budget? Sometimes you wonder. In the latest wrinkle Congress and the White House are creating new off-budget corporations whose sole purpose is to ensure that the rising costs of paying for previous off-budget commitments stay, you guessed it, off-budget. The first, called simply the Financing Corp., was formed in 1987 to raise $10.8 billion for the initial bailout of the savings and loans -- back in the days when some argued that no more money would be required. A successor, the Resolution Funding Corp., was set up as part of this year's S&L bailout and authorized to raise $30 billion in off-budget borrowings. To be fair, Congress and the White House did finally drop some of those S&L bailout outlays into the fiscal 1989 budget. But they did so only after they had already met last fall's Gramm-Rudman target. Under the Gramm-Rudman rules, of course, once you jiggle the numbers to meet your forecast for any given year, it doesn't matter how big the actual deficit turns out. This sort of flimflammery -- and the growing reliance on off-budget commitments it generated -- is one of the sorrier legacies of the 1980s. Neither should continue into the 1990s.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: UNCLE SAM'S $4.8 TRILLION WORTH OF HIDDEN RISKS