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Fannie, Freddie uneasy about Senate overhaul bill

WASHINGTON, March 29 (Reuters) - U.S. mortgage giants Fannie Mae and Freddie Mac expressed concern over the weekend about a plan to overhaul government supervision of them after a Freddie Mac accounting scandal rattled markets last year.

Freddie Mac Investor Relations Vice President Peter Mahoney said legislation proposed by Senate Banking Committee Chairman Richard Shelby could unsettle capital markets. Both companies said they are trying to get the proposed bill changed.

Shelby, an Alabama Republican, on Friday proposed creating a new regulator able to close a failing enterprise, adjust minimum capital levels, and reject new programs.

The proposal comes amid building momentum in Congress for tighter supervision of Fannie Mae (nyse: FNM - news - people) and Freddie Mac (nyse: FRE - news - people) after Freddie Mac acknowledged last year that senior executives misstated earnings to mask their volatility.

Mahoney said language giving a new watchdog agency receivership authority -- power to shut down a failed enterprise -- and to raise its minimum leverage ratio has made markets nervous.

"Senator Shelby's draft legislation, which the Senate Banking Committee will discuss as early as this week, includes a number of provisions that have raised concerns in the capital markets," Mahoney said in a letter to investors dated Sunday.

He said Freddie Mac is working with the top Democrat on the panel, Sen. Paul Sarbanes, to modify the proposal.

Fannie Mae spokesman Chuck Greener also said "certain elements" of the draft bill would hurt the company and are likely to generate opposition to the bill, but did not elaborate. Spokesmen for Fannie Mae and Sarbanes did not immediately respond to requests for comment on Monday.

Shelby's proposal comes amid intense Congressional debate over whether the size of Fannie Mae and Freddie Mac pose potential risks to the U.S. financial system, and whether regulatory overhaul could hurt the U.S. housing system, which has been a rare bright spot in an economy that has struggled to recover convincingly from the 2001 recession.

Senate aides said last week the goal of the legislation was to focus on strengthening oversight rather than restricting the operations of Fannie Mae and Freddie Mac.

Many observers believe that legislative prospects for Shelby's bill depend on whether he can muster bipartisan support so it can avoid getting bogged down in election-year politics.

National Association of Home Builders Chief Executive Jerry Howard said on Sunday the proposal would weaken government support for housing and raise mortgage costs.

"This bill is very hostile to housing. It will radically alter investors' perceptions of 'government sponsorship,' place (the) housing mission in a backseat position, add an unnecessary capital drag and stymie new innovation of affordable loan products," he said in a statement.

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