They argue that Fannie and Freddie have used their government-sponsored advantage, most notably their ability to borrow money at favorable rates, to build outsized investment portfolios that could pose significant risks to taxpayers and the mortgage finance market if the companies fail.
The companies were chartered by Congress to provide a stable source of cash for home mortgages. They buy mortgages directly from lenders, hold on to some of them and sell others to investors in the form of securities. The companies also make money by guaranteeing mortgage-backed securities sold directly by lenders.
Mortgages that Fannie and Freddie keep on their books are known as their retained portfolios, and in the 1990s they swelled as the housing markets boomed. Together, their retained portfolio is about $1.5 trillion. Though that is down slightly from two years ago, it is up more than tenfold in the past 10 years.
Baker's bill would allow the new regulator to limit either company's retained portfolio of mortgages to $200 billion if the regulator determines that going above that level would jeopardize the companies or the housing markets.
Mortgage bankers and home builders are expected to fight such efforts, arguing that any retreat of Fannie and Freddie from the mortgage finance market would hurt home buyers by curtailing the amount of funds available for mortgages, making them more expensive. Both the powerful National Association of Home Builders and the National Association of Realtors said they would oppose any legislation that would "reduce the capacity" of Fannie and Freddie.
The companies misapplied accounting rules in managing their retained portfolios. For Freddie, the result was an upward restatement of earnings; for Fannie, it could mean as much as $12 billion downward reduction in previously stated earnings.
Falcon, whose agency uncovered Fannie's problems last year after being criticized for missing Freddie's in 2003, said yesterday his decision to resign was not timed to the advent of the legislative debate over regulation. He said that he had submitted his resignation two years ago but that President Bush's nomination for his replacement was withdrawn, so he stayed on. He said he did not intend to stay beyond his first five-year term, which ended in 2003.
"I've been putting it off and putting it off," he said. "It just seemed that there was always urgent issues of a serious nature to deal with and I didn't want to leave at that time. It seems to me now I can leave with some comfort that we have solved many of the most urgent issues."
Falcon was bitterly criticized by Raines and Fannie's congressional allies in September after OFHEO released a report that first called into question Fannie's accounting. Shelby said yesterday that he thinks Falcon has been vindicated.
"After all is said and done, you have to give him an A-plus for pointing out a lot of problems in the GSEs, particularly Fannie and Freddie, when a lot of people were not listening," said Shelby, who will play a leading role in crafting legislation for a new regulator. "He stuck by his guns. He's distinguished himself."
Falcon said he will probably go into the private sector, though he has no prospects as yet. A native Texan, he has been in Washington for 15 years, formerly as a staff lawyer for the House Banking Committee.
"We appreciate the forthright and cooperative manner in which Director Falcon has worked with the Fannie Mae Board of Directors and interim management team over the past several months. We wish him well," Fannie Mae Chairman Steven B. Ashley said in a written statement. David R. Palombi, a Freddie Mac spokesman, called Falcon "direct and forthcoming to deal with." He added, "We have a great deal of respect for the job that he did, and we wish him well in all future endeavors."
In the past, while publicly claiming a desire for a new regulator, both companies have worked behind the scenes to successfully kill legislative efforts. This year, officials at both companies say, is different, because both acknowledge the need for stable, consistent regulation to calm their creditors and investors.
In addition, neither Fannie nor Freddie has the same lobbying might it once wielded.
District-based Fannie, whose political influence was once considered indomitable, said it has "sharply curtailed" its use of lobbyists. A source familiar with Fannie's spending said six Washington lobbying firms, a third of the company's outside contingent, have been let go in recent weeks.
Palombi said Freddie has cut its outside political lobbying expenses by 25 percent since the first of the year and will probably cut it further as part of a broad effort to scale back its consulting expenses.
Staff writer Jeffrey H. Birnbaum contributed to this report.