Downsizing Fan and Fred

If the government-sponsored mortgage giants known as Fannie Mae and Freddie Mac knew what was good for them, they'd accept proposals to create a more muscular regulator over them and reduce their supersized $1.5 trillion portfolios.

Those proposals were laid out in a bill introduced on Tuesday by Rep. Richard Baker (R), chairman of the House financial services subcommittee on capital markets. His measure rightly reflects a growing, post-Enron alarm in Congress over the risks a potential collapse of these two beasts poses to the nation's economy. Yet officials at Freddie Mac have already signaled opposition to these reforms - which are endorsed by lead Bush administration officials - saying they would "adversely affect our future profitability."

The Baker bill calls for a new regulator for Fan and Fred, one that would be able to adjust the size of their portfolios if they were deemed a risk to economic "safety and soundness." The regulator also could put Fannie and Freddie in receivership if they ran into serious trouble and would have the authority to approve major housing-related initiatives proposed by both mortgage giants.

Fannie and Freddie have expanded beyond their original government charter of providing affordable housing to low-income Americans - so much so, they now control half of the $7.6 trillion US mortgage market. Their portfolios grew some tenfold between 1990 and 2003. Critics contend they've used those portfolios simply to generate profits for their stockholders, not to further their charter.

If they failed, taxpayers could be forced to pay off the mortgage duo's debts because of their quasi-governmental status, which includes a nominal line of credit with the Treasury Department that allows them to undercut the banks by borrowing at below-market rates.

Fan and Fred's intense lobbying, together with a currently weak regulator, has let them balloon in size for years. But both were recently red-faced by nothing less than multibillion-dollar scandals that used accounting tricks to smooth earnings.

For Fannie, that meant being forced to restate an estimated $11 billion in earnings going back to 2001. In 2003, Freddie was forced to reduce its earnings by $5 billion - proof positive a new regulator with enhanced oversight powers is in order.

Although the bill falls short by not calling for an end to the line of credit with Treasury, the measure deserves broad support for being the most comprehensive effort to date to rein in these outsized companies.