Fannie Mae and Freddie Mac shares fell sharply Tuesday as the market fretted over Federal Reserve Chairman Alan Greenspan's comments that the benefits conferred by the government on the two mortgage buyers should be reviewed.

While other financial stocks rallied, Fannie's shares fell as much as 7% during the day and closed at $57.125, off 5.19%. Freddie's stock fell more than 7% before closing at $42.9375, off 6.15%.

Spreads on Fannie's and Freddie's debt widened briefly in the morning, before recovering. But their stocks were among the day's biggest losers tracked by American Banker. The newspaper's index of 225 banks was up 1.81% as bank stocks again rallied during a broad market selloff that dragged the Dow Jones industrial average down 1.14%, to 10422.27.

In a letter dated May 19 to Rep. Richard H. Baker, R-La., Mr. Greenspan said "it is appropriate for Congress to periodically consider" the "implicit subsidies" enjoyed by the government-sponsored enterprises.

The Fed chairman did not endorse, nor even mention, a bill sponsored by Mr. Baker that would toughen regulation of the GSEs. Nor did he address the question of the risk posed to the government by the GSEs, saying it is the Fed's policy not to comment "on any institution or particular group of institutions with regard to systemic risks."

But Mr. Greenspan's letter spooked investors at a time when the GSEs have been under fire in Washington and in the media.

"The letter from Greenspan was not necessarily threatening, but I think his remarks could be interpreted as providing a foundation for subsequent negative legislative action," said Jonathan E. Gray, an analyst at Sanford C. Bernstein & Co.

That was certainly Mr. Baker's interpretation. "He took us into a new area which could be productive," the congressman said Tuesday at an American Enterprise Institute forum in Washington.

In the letter, Mr. Greenspan noted that the GSEs enjoy low borrowing costs due to "the belief of purchasers of their debt that the government is unlikely to let a GSE fail." That perception, he said, stems from the fact that they are chartered by the government to support homeownership and housing.

However, Mr. Greenspan said, the GSEs "alter the housing finance markets only to the degree that they pass through to homebuyers part of their government subsidy."

Even when the implied guarantee benefits homeowners, Mr. Greenspan wrote, it distorts the markets. "Subsidies accorded to GSEs are, of necessity, at the expense of other federal or private sector initiatives and hence are ultimately financed by households, either through taxes or through the reduced accumulation of wealth."

Mr. Gray said Mr. Greenspan's remarks could be construed as arguments in favor of imposing a user fee on the GSEs, to compensate taxpayers for the cheap funding the GSEs enjoy because of their government ties.

However, other analysts said they were not worried about the political risks to Fannie and Freddie, noting that ultimately it is Congress, not the Fed, that will decide if any changes should be made to oversight of the two companies.

Whatever theoretical arguments Mr. Greenspan may make about them, housing subsidies are popular among voters, these analysts said.

"Are congressmen going to vote for legislation that tinkers with the GSEs and run the risk of driving mortgage rates up?" said Kenneth A. Posner, an analyst at Morgan Stanley Dean Witter. "I can't think of anything positive they could tell their constituents" to justify higher mortgage costs.

The contents of Mr. Greenspan's letter were reported in Tuesday's edition of The Wall Street Journal, and the full text became widely available Tuesday morning.

Mr. Greenspan's comments come a week after hearings on the Baker bill at which Fannie and Freddie officials showed no hint of compromise. Mr. Baker acknowledged last week that his bill is unlikely to pass this year.

But the congressman appeared more upbeat Tuesday than he did at last week's hearings. He said he planned to ask the Congressional Budget Office to update its estimate of the value of the GSEs' implied government guarantee.

In a 1995 study the CBO concluded that the implied support from the government was worth $6.5 billion per year to Fannie and Freddie, of which $2.1 billion was retained by shareholders rather than passed on to homebuyers. Mr. Greenspan cited these findings in his letter to Mr. Baker.

Erick Bergquist contributed to this article.

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