White House Sets Forth Plan To Limit Size of Fannie, Freddie

It is unclear by how much such a rule would reduce the nearly $1.5 trillion mortgage portfolio that the two companies hold, and the idea is still subject to modification as the legislation proceeds through Congress.

But one analyst, reflecting the opinion that Fannie and Freddie have grown too big, said the change could be dramatic. Under Treasury's proposal, the companies "would be reduced to look like what Dr. Atkins promises if one goes on his diet -- a shadow of one's former self," said Karen Shaw Petrou, a financial industry consultant who co-publishes a newsletter on Fannie and Freddie.

While Fannie and Freddie, stung by revelations about their accounting practices, are generally accepting of stricter regulation, they are also worried it could be carried too far.

A Freddie Mac spokeswoman said the company's investment portfolio is integral to its mission to keep cash for home buying plentiful. "Our portfolio supports our affordable housing activities by allowing us to increasingly subsidize" more marginal home buyers, said Sharon McHale. "The portfolio is very conservatively managed and tightly regulated. Very few institutions in the world manage such a tight book, provide the monthly disclosures to prove it, or could pass the risk-based stress test that we do."

The portfolio also allows Freddie to attract foreign capital, which it makes available to lenders, and ultimately, to home buyers.

The mortgage portfolio "enables us to in-source a significant share of the financing of American homeownership," she said.

Yesterday, the Fed chairman sought to counter such arguments, citing the fact that housing markets "have functioned well" over the past two years, even as Fannie and Freddie were in the midst of uncertainty because of their accounting problems.

Freddie has largely rebounded from its problems two years ago. Fannie is still researching the extent of its accounting foul-up, though OFHEO yesterday reported that the company now has adequate reserve capital on hand to guard against losses -- an important fiscal milestone.

The administration also delivered a copy of its proposal yesterday to Senate Banking Committee Chairman Richard C. Shelby (R-Ala.), whose committee is expected to draft legislation next month.

"I'm hoping in the weeks ahead we can bring about a strong piece of proposed legislation and that we can get some bipartisan support for it, because I think it is absolutely necessary to have a strong regulator" for the two companies, Shelby said. "It's necessary that their mission be understood and that the regulator know everything about the risk that they pose and the regulator have the power to rein that risk in if they deem it a real problem."