By Kathleen Day
Washington Post Staff Writer
Wednesday, October 8, 2003; Page E01

The Bush administration is at odds with the Republican-controlled House Financial Services Committee over legislation to impose tougher oversight over the nation's two largest funders of home loans, Fannie Mae and Freddie Mac.

The dispute dims prospects for quick passage of a bill at a time when recent accounting scandals at Freddie Mac have focused attention on the need for better policing of the two financial giants, government and industry officials said yesterday.

A senior Treasury Department official called the legislation a weak effort that preserves the status quo. The comments threw into question compromises carefully crafted over the past week. A committee meeting scheduled for today to make final changes before sending it to the floor of the House was postponed yesterday evening.

"There is the need for a new regulatory system," said Assistant Treasury Secretary Wayne A. Abernathy. "This is not a credible bill; it's not real reform."

Rep. Michael G. Oxley (R-Ohio), chairman of the House Financial Services Committee, did not return telephone calls. Rep. Richard H. Baker (R-La.), who heads the Financial Services Committee's subcommittee that has jurisdiction over the two companies, had no comment.

The administration objects to two of the bill's key provisions. One would make the new regulator of the companies an independent unit of Treasury, much like financial regulators housed in the agency that oversee banks and thrifts. Another would give the Department of Housing and Urban Development oversight over the companies' business activities.

The independence provision has broad support from committee Democrats and Republicans. The HUD provision was pushed mostly by Democrats but had been accepted by Oxley and Baker as a compromise needed to move the bill forward.

Treasury wants more control over the new regulator, including the ability to oversee its budget and its testimony to Congress. And it wants the authority to review the companies' business activities to ensure that they do not "stray" beyond their intended purpose of buying home loans from banks and other mortgage lenders, Abernathy said.

"It does not make sense to move this regulator to Treasury if Treasury does not have the tools to make it effective," said Treasury spokesman Rob Nichols. Both he and Abernathy fell short of saying Treasury would recommend that President Bush veto the bill in its current form.

Fannie Mae and Freddie Mac are congressionally chartered, publicly traded companies that were created to keep mortgage loan money plentiful, which they do by buying loans from lenders and bundling them into securities that are sold to the public. Potential rivals in the housing market, including many of Freddie and Fannie's customers, complain that the companies' billions of dollars in tax breaks and below-market borrowing costs give them an unfair advantage. That will be especially so if Fannie and Freddie try to expand beyond buying loans in an effort to maintain their earnings, the potential competitors say.

Two key Democrats, Reps. Barney Frank of Massachusetts and Paul E. Kanjorski of Pennsylvania, said they will oppose any attempt to make the regulator less independent from Treasury or to move business oversight out of HUD. Kanjorski said he was surprised by the White House position, given that the bill as it stands has wide bipartisan support on the committee.

"At some point it's better we don't mess with this than do a bad job," Kanjorski said.

Frank said he supports giving Treasury responsibility for making sure that Fannie and Freddie operate in a manner that doesn't pose a risk to the economy or taxpayers. But he opposes giving Treasury the right to approve or disapprove business activities. He said he worries that Treasury would sacrifice activities that are good for consumers in the name of lowering the companies' market risks.

Abernathy reiterated the Treasury view that the 12 Federal Home Loan Banks should also be regulated by the new entity but said that is not a requirement for administration support.

Fannie Mae and Freddie Mac continue to say they support the idea of having their regulator in Treasury, but government sources say Fannie Mae has lobbied hard to alter the bill to its liking, including keeping some oversight in HUD. And Fannie Mae is lobbying to exclude the Federal Home Loan Banks from Treasury oversight or, if they are included in this bill, to make them pay the same federal taxes that Fannie Mae and Freddie Mac pay.