Republicans in the U.S. Senate on Wednesday introduced legislation to create a new federal regulator with the authority to close mortgage funders Fannie Mae and Freddie Mac.

The legislation is aimed at creating a substantially stronger regulator for the government-sponsored entities, and cutting the ties Wall Street sees as linking the companies to the government. Fannie Mae and Freddie Mac are the No. 1 and No. 2 U.S. mortgage finance companies.

The proposal would give the regulator the power to approve new programs and products proposed by Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News), as well as Federal Home Loan Banks, another GSE and the largest collective source of home mortgages in the United States.

The bill, from Nebraska Sen. Chuck Hagel, John Sununu of New Hampshire and Elizabeth Dole of North Carolina, would also give the regulator greater discretion in setting capital standards to protect against insolvency. The regulator would have the authority to close down a failing GSE to protect against a government bailout as well.

"A new independent GSE regulator is critically important and in the best interests of the housing and finance markets, investors and the American taxpayer," Hagel said in a statement.

Fannie and Freddie, which carry congressional charters that have led Wall Street to believe the federal government would bail out the companies in a crisis, became a target for lawmakers eager to strengthen regulation after an accounting scandal at Freddie Mac in 2003. Since then, billions in accounting problems have been uncovered at Fannie as well.

The Senate Banking Committee, which considers legislation to overhaul regulation of the GSEs, held an organizational meeting on Wednesday to begin setting a hearing schedule.

Sen. Richard Shelby, the Alabama Republican who chairs the Senate Banking Committee, has said any "meaningful" bill to reform Fannie and Freddie must strengthen their regulator by giving it the power to set minimum capital requirements, assume receivership responsibility and approve new products.

STRONGER REGULATOR

Freddie Mac President and Chief Operating Officer Eugene McQuade told Wall Street analysts on Wednesday that he supported a stronger regulator, but one that values Freddie's mission to promote homeownership.

"Obviously there's a lot going on in the headlines now, there's a lot of posturing," he said of comments from lawmakers about legislation.

He did not comment on specific proposals being floated by members of Congress, but said the GSE regulator "should have some ability based on the risk levels to adjust the capital" requirements of the companies.

"What we would be very supportive of is good strong legislation and getting it done as quick as possible this year to get the overhang away from us," McQuade said at a conference in New York.

In the U.S. House of Representatives, Louisiana Republican Richard Baker plans to introduce GSE legislation that is broader than a bill considered last year, his spokesman said. That bill will likely not be introduced before next week.

Baker also will propose a new regulator to supersede the current Office of Federal Housing Enterprise Oversight. The new entity, under Baker's plan, would have receivership power and some authority over product approval, said spokesman Michael DiResto. Baker's bill may also address the regulator's authority over executive compensation.

Fannie and Freddie buy mortgages from originators and package them as mortgage-backed securities. They also keep mortgages in their portfolios as whole loans or securities.

Shares of Freddie Mac traded down 9 cents at $65.78 while Fannie shares rose 47 cents to $64.78.

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