THE WALL STREET JOURNAL

Fannie Mae and Freddie Mac are “a point of vulnerability for the financial system” because their capital is meager in relation to their mortgage assets and obligations, the companies’ main regulator said.

With that skimpy capital cushion, the government-sponsored companies “could pose significant risk to taxpayers as well as to financial institutions and other investors,” the regulator, James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said at a conference in Chicago.

The Senate Banking Committee is prepared to vote as early as Tuesday on legislation aimed at improving regulation of Fannie and Freddie. That bill would replace Ofheo with a new regulatory agency holding more authority to adjust capital requirements for Fannie and Freddie. The House already has passed a version of that legislation.

Fannie and Freddie each have “core” capital equaling less than 2% of the mortgages they own or guarantee. Fannie’s core capital as of March 31 was about $43 billion, and the company has since then raised about $6.5 billion more through sales of common and preferred shares, bringing the total to around $50 billion.

If Fannie were a bank, regulators would require it to hold $135 billion of capital to be considered “well-capitalized,” estimated Karen Petrou, managing partner at research firm Federal Financial Analytics in Washington.

Fannie and Freddie argue that, as government-backed providers of money for home mortgages, they aren’t equivalent to banks. Setting capital requirements promises to be tricky for the new regulator if Congress approves the legislation. The two companies are likely to resist any requirements that they see as unduly reducing their profitability or ability to play a major role in the mortgage market. But some big mortgage lenders say Fannie and Freddie should face capital rules as stiff as those for federally regulated banks.

Responding to Mr. Lockhart’s comments, David Palombi, a spokesman for Freddie, said his company is helping to shore up the wobbly U.S. housing market and has a “strong and sound capital position.” Mr. Palombi added: “I’d say we’ve been a primary point of stability for the financial system.” Fannie Mae declined to comment.

Sen. Christopher Dodd, a Connecticut Democrat and chairman of the Senate Banking Committee, said Friday that he was cautiously optimistic that lawmakers can approve a package of housing legislation within a week. Aside from creating a new regulator for Fannie and Freddie, the legislation would let the Federal Housing Administration expand its insurance program to help more people refinance into federally backed loans.

In his speech, Mr. Lockhart questioned whether Fannie and Freddie erred in recent years by purchasing too many securities backed by subprime and other riskier types of home loans. Conceding that he was speaking with the benefit of hindsight, Mr. Lockhart suggested that the companies should have seen that prices for such securities in recent years were pushed “above their long-term intrinsic values.”