Fannie, Freddie regulator wants tighter rules

The U.S. regulator for home finance giants Fannie Mae and Freddie Mac is drafting tighter rules for the agencies because similar Congressional proposals have been slow in coming, the Wall Street Journal said on Wednesday.

The Office of Federal Housing Enterprise Oversight (OFHEO) is working on a new rule that would make clear how the regulator could take control of the two agencies and "wind down the companies' operations" should they run into financial trouble, the Journal said

Such a rule would indicate to the holders of Fannie's and Freddie's vast amounts of debt that just because the agencies are closely linked with the U.S. government, this does not mean the government will be there to bail out bondholders if anything were to go wrong at the two mortgage finance firms, the Journal said.

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Armando Falcon, director of Ofheo, said he is working on regulations that could put Fannie or Freddie into a "liquidating conservatorship," according to the Journal. Short of receivership, the rule would "still have the effect of winding down the companies," the Journal said.

Some lawmakers and the Bush Administration have raised worries that the size and rapid growth of the mortgage finance agencies could pose risks to the U.S. financial system.

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U.S. Senate Banking Committee Chairman Richard Shelby has been pushing in Congress for stronger oversight of Fannie and Freddie.

Freddie Mac rattled markets with a $5 billion earnings restatement and the replacement of five senior officials, including a chief executive and his immediate replacement, after acknowledging company leaders ignored accounting rules to mask earnings volatility.

A federal regulator launched a review of Fannie Mae's accounting practices as a precaution after Freddie Mac's problems and warned March 31 that the review may result in an earnings restatement for Fannie Mae.