WASHINGTON - Legislation to overhaul the government's relationship with Fannie Mae and Freddie Mac is not going to pass this year, but its dogged sponsor insists Congress must at least beef up the tiny agency charged with supervising the secondary mortgage market giants.

Consider this: If Fannie and Freddie were national banks, the Office of the Comptroller of the Currency would charge an annual fee of $71 million to cover the cost of their oversight. Yet the fiscal-year 2000 budget of the Office of Federal Housing Enterprise Oversight is just $19.5 million. OFHEO, pronounced o-FAY-o, has 95 employees to keep tabs on the government-sponsored enterprises' $1.1 trillion of assets. The Comptroller's Office has 2,842 employees to supervise the $3.3 trillion of national bank assets.

Created in 1992 by a Congress that did not want to see a S&L-like crisis engulf Fannie and Freddie, OFHEO was given until the end of 1994 to develop capital rules for them. Nearly six years past the deadline, it promises to finish the rules by yearend.

Supervision of Fannie and Freddie is split between OFHEO, which is the safety and soundness regulator, and the Department of Housing and Urban Development, which ensures they meet their public mission of increasing homeownership.

HUD's budget includes no money for this job, and OFHEO fights in Congress every year for its appropriation, rather than levying fees from the entities it regulates, as the Comptroller's Office does. (OFHEO's fiscal 2001 request is still pending but has been slashed 18%, to $22 million.)

Rep. Richard Baker, R-La., has waged nearly a one-man crusade for the Housing Finance Regulatory Improvement Act, a bill he introduced Feb. 29 that would consolidate GSE oversight in a new, independently funded agency. It would also terminate Fannie and Freddie's $2.25 billion lines of credit with the Treasury, increase disclosure requirements, and impose tougher reviews of new activities.

Last week Rep. Baker said that he plans to tackle GSE reform in stages, and that strengthening oversight is his first goal. "The air is not out of the tires," he said. "Let's get consensus on regulatory enhancements, and I want to pursue that in this session of Congress. … I think there is a really good chance" of enactment.

In addition to funding the new agency through fees, Rep. Baker said he wants to subject Fannie and Freddie to more "bank-like" supervision, including prompt corrective action that lets examiners impose increasingly severe remedies as an institution's capital declines. The new regulator also needs the same arsenal of enforcement tools the bank regulators use, like cease-and-desist orders, he said.

It's unlikely that Congress will enact any GSE-related bill before adjourning for the year Oct. 6. But as the chairman of House Banking's capital markets subcommittee put it, "We bet on everything in Louisiana. If you can lose, we bet on it."

Fannie and Freddie appear willing to roll the dice too, by refusing to compromise with Rep. Baker. If the Democrats - who have staunchly defended the GSEs- regain control of the House in the November elections, he will have little power next year. But if the Republicans keep a majority, he has a shot at the House Banking Committee chairmanship, a powerful position from which to press his bill.

At a four-hour roundtable discussion on the bill hosted last Tuesday by Rep. Baker and the subcommittee's ranking Democrat, Rep. Paul E. Kanjorski of Pennsylvania, officials from Fannie and Freddie said they favor a strong, well-funded regulator.

If that sounds like consensus, it's not. Fannie and Freddie officials did not endorse a single change to their oversight. Tom Donilon, Fannie's executive vice president for law and policy, called Rep. Baker's single agency "overly complicated."

Asked if the enterprises would support legislation that would remove its regulator from the fickle appropriations process, Mr. Donilon replied, "We certainly think our regulator should be adequately funded."

Mr. Donilon and Mitch Delk, Freddie Mac's senior vice president for government affairs, argued that their companies are subject to scrutiny from the markets, their investors, Congress, and the public, as well as from OFHEO and HUD.

"I don't know of a company that is held to a higher accountability than the company I represent," Mr. Donilon said.

The market has been watching and reacting to the legislative scene all year. Fannie and Freddie share prices were hammered last spring, when a Treasury official endorsed Rep. Baker's plan to repeal the their lines of credit. But since Labor Day, as the chances of enactment have dimmed, Fannie's stock is up 15%, and Freddie's is up 19%.

Salomon Smith Barney analyst Thomas O'Donnell, who reiterated his "buy" rating for both stocks last week, said in a report that Rep. Baker's bill is a "solution seeking a problem." Still, the debate has done long-term harm to Fannie and Freddie's stock, he said. "The shares have become trading vehicles rather than the core holdings they used to be," he said.

Where things go from here is unclear. Among other things, Rep. Baker has asked the General Accounting Office and the Congressional Research Service to highlight the differences in regulatory power between OFHEO and the banking agencies.

During the roundtable Rep. Baker praised the enterprises as well-managed companies with solid earnings and sophisticated tools to measure risk. But he added: "You may be right. You may be safe. But don't you think I ought to be able to ask someone besides you?"

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