The White House on Monday called for a new, stronger regulator for government-sponsored housing enterprises, saying a problem at one of the giant mortgage funders could spread throughout the financial system.

The Bush administration, in an analysis of the U.S. economy that accompanied its budget proposal, questioned the value of the three housing GSEs — Fannie Mae , Freddie Mac and the Federal Home Loan Bank system — given the risks their operations pose.

"The potential for systemic risk arising from the GSEs' size and their central role in mortgage markets combined with the difficulty of managing the risks inherent in a large mortgage portfolio raise fundamental questions about the value they add … relative to the risks their current operations pose," the Bush administration wrote.

A new regulator should be created that consolidates Fannie Mae's and Freddie Mac's regulator with that of the Federal Home Loan Bank system, the Bush administration said.

It should have expanded enforcement authority, the ability to place the businesses in receivership and "unambiguous authority" to set risk-based and minimum capital requirements, according to the budget document.

The U.S. Housing and Urban Development Department also should have the authority to penalize Fannie Mae and Freddie Mac for failing to meet goals for affordable housing set out last year, the White House said.

Fannie Mae faces an earnings restatement of potentially $9 billion after accounting errors were uncovered last year. That led to the ousting of the company's chief executive and chief financial officers and followed accounting problems at Freddie Mac in 2003.

Fannie Mae and Freddie Mac buy mortgages from originators and package them as mortgage-backed securities. They also keep mortgages in their portfolios as whole loans or securities. In 2003, the GSEs accounted for 47.2 percent of total residential mortgage debt outstanding, their regulator said.

"MISPERCEPTION" OF BACKING

The White House said that while the housing GSEs generate "some benefits" in supporting the mortgage market and lowering mortgage rates, they face interest rate risk that when coupled with poor management can lead to operational failure.

The management of interest rate risk and operations risk is a significant challenge for the GSEs, according to the White House, because of their size, regulatory structure and lack of "full market discipline."

Investors cannot discipline the companies because they do not have enough information about their risks and financial condition, the Bush administration said.

This market discipline is also hindered by "a misperception that the federal government would back GSE securities in the event of a GSE default," the White House said.

White House comments on a misperceived link between Fannie and Freddie and the U.S. government echoed concerns voiced on Capitol Hill, where some Republican lawmakers are pushing legislation aimed at cutting the ties Wall Street sees binding the GSEs and Washington.

Committees in the U.S. House of Representatives and Senate this week will hold hearings on the GSEs, with expected testimony from officials of the U.S. Securities and Exchange Commission and Department of Housing and Urban Development.

Legislation to strengthen the GSE regulator did not pass last year. The Treasury criticized it as too weak, while a key Senate Republican blamed intense lobbying by Fannie and Freddie. Freddie Mac said on Monday its chief executive resigned as chairman of its Foundation board to focus on the legislative and business issues the company faces.

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