Fannie, Freddie Regulator Sees More Risk Ahead

The unsettled U.S. mortgage and housing markets mean that Fannie MaeandFreddie Macremain exposed to serious risks, their federal regulator said on Tuesday.

"Both companies remain classified as significant supervisory concerns," the Office of Federal Housing Enterprise Oversight said in its annual report to Congress.

"The extraordinary declines in the housing and mortgage markets have greatly increased their credit and interest rate risks," OFHEO director James Lockhart said in a letter to lawmakers.

Despite the turmoil, OFHEO concludes that the two government-sponsored enterprises have done good work to buttress internal controls and prepare themselves for the rocky market.

Fannie Mae and Freddie Mac "need to raise additional capital" in order to protect themselves against losses even though they have recently won some relief to expand their mortgage investments, their regulator said.

The nation's two largest sources of mortgage financing have for years been under tight oversight and rules limiting their growth.

In March, the companies were permitted to expand their mortgage investments and OFHEO said it expects to allow them to increase holdings further this year.

Shares of both Fannie Mae and Freddie Mac are trading higher.