Omnious signs: after years of muscling and/or seducing, Fannie and Freddie face some challenges bigger than they ever expected.

• Author: Wallison, Peter J.
• Position: Federal Home Loan Mortgage Corp., Federal National Mortgage Association

After years of success in terrifying the political world and seducing the financial community, the government-sponsored enterprises and particularly Fannie Mae--are now threatened with real change. The precipitating cause is a tough and determined stand by the Bush Administration for stronger regulation. This has inspired the GSEs' previously torpid regulator the gracefully named Office of Federal Housing Enterprises Oversight--to fight for its life with aggressive regulation, and apparently persuaded at least one rating agency that it may actually be sensible to take no for an answer. In this two-front war, Fannie is in an unaccustomed position--it is no longer in full control of the outcome. As a result, it has been required to call its usual allies into the open for whatever support they can provide.

For almost the last full year, Fannie and Freddie have been buffeted with actions and statements by the Administration and others--including OFHEO--that call into question whether the two powerful GSEs still have control of their political risk.

* The Treasury Department, insisting on tough minimum requirements for new regulatory legislation for the GSEs, showed its determination by opposing and ultimately dismembering a House Banking Committee bill that the Treasury considered too weak. This was the first sign that Fannie and Freddie, despite their massive network of lobbyists, would not have their usual way with the legislative process.

* The Office of Management and Budget, in an analysis that accompanied the President's 2005 budget, declared that Fannie and Freddie were undercapitalized, in need of serious new regulation, and failing to perform an important part of their mission: providing affordable housing, especially for the minority community

* At the request of OFHEO, the GSEs' regulator, Congress voted $7.5 million to do a forensic audit of Fannie's accounting.

* With that audit underway, OFHEO suggested that it had already turned up accounting problems, warning the market that Fannie might have to restate its financial reports for previous years. When Fannie's spokesman denied that the company knew anything about this, OFHEO's director issued a statement calling Fannie's denial false and misleading.

* OFHEO proposed new corporate governance regulations that, among other things, would require Fannie and Freddie to split the offices of chairman and CEO, and limit the terms of their directors. OFHEO also announced that it was considering whether it had the power to institute a receivership for either of the GSEs, even without specific legislation.

* The White House let it be known that the President would no longer appoint the five directors of Fannie and Freddie that he is authorized to appoint, a clear effort to eliminate one of the links to the government that underpin Fannie and...