Banks that invested heavily in two Washington mortgage giants are faced with steep losses in the wake of the government's bailout, financial analysts said.

Regulators took control of the Federal Home Loan Mortgage Corp. and the Federal National Mortgage Association Sunday, prompting a quick decline in their share values, The Washington Post reported Tuesday.

Some smaller banks, investing on the Office of the Comptroller of Currency's word that FANNIE MAE (NYSE: FNM) and Freddie Mac were safe investments, are faced with the prospect of raising capital. Some smaller banks may fail as a result, the Post reported.

Gateway Financial Holdings of Virginia Beach, paid $40 million for shares now worth $5 million, the Post reported. The bank is "on the bubble" of needing to raise capital, the bank said.

M&T Bank of Buffalo, N.Y., owns $120 million worth of Freddie Mac and FANNIE MAE (NYSE: FNM) shares. Chief Financial Officer Rene Jones quickly assured investors, a total write off "would just have minimal impact on our capital."

"Across the industry, banks do not have significant exposure," Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., said Sunday. "Any negative impact will be narrowly focused only on a few smaller institutions."