As the 109th Congress returns for its final weeks, I believe there is an urgent need to enact bipartisan legislation to reform the housing Government-Sponsored Enterprises. On a combined basis, Fannie Mae and Freddie Mac (the Enterprises) and the 12 Federal Home Loan Banks (FHLBanks) represent nearly half the total mortgage debt outstanding in the U.S. Their combined borrowings and guaranteed mortgage-backed securities (MBS), totaling $5.2 trillion, now exceed the total publicly held debt of the U.S. government — $4.9 trillion.

Why is reform necessary? The story of Fannie Mae’s and Freddie Mac’s unconstrained growth, earnings manipulation, accounting problems and gross mismanagement has been well-reported. It has cost shareholders tens of billions in market value, fines, and expenses to fix the problems; and in turn, shareholders have sued for billions of dollars. Despite being NYSE-listed companies, Fannie and Freddie will not file current quarterly financial reports until sometime next year at the earliest. It will take several years to truly fix all of their problems. Although not on the same scale, several of the FHLBanks are working their way out of similar problems.

Congress created the Office of Federal Housing Enterprise Oversight (OFHEO) 14 years ago to ensure taxpayers would never have to pick up the tab in the event of failure at Fannie Mae or Freddie Mac. Unfortunately, OFHEO does not have all the tools it needs. Considerable problems at one or both of these companies could have serious repercussions in domestic and even global financial markets.

Their government charters enable these companies to take on more risk than other major financial institutions. In addition to their significant operational difficulties, the Enterprises have lower capital requirements than banks, massive investment and derivative portfolios, limited discipline from credit markets, an inability to diversify their investments and no limit on bank investments in their securities.

There were no constraints on shareholders’ pressure for growth and management’s desire for maximum bonuses. To put this growth in perspective, compare the Enterprises’ growth to that of the nation’s GDP and mortgage market. During the last 15 years, the nation’s GDP doubled, the mortgage market tripled, the Enterprises’ guarantees quadrupled and their portfolios grew tenfold. Unconstrained growth is a recipe for disaster. Fannie Mae and Freddie Mac present potentially very large systemwide risks to financial markets and financial institutions. That’s why it is vital that Congress pass legislation creating an empowered regulator now.

Congress is well along in preventing a potential crisis with a House-passed bill and one passed by the Senate Banking Committee. The sticking points appear to be focused on two areas, but progress continues on a compromise. The first issue is properly structuring a fund to increase affordable housing. The second is ensuring the Enterprises do not take unnecessary risks through their large portfolios. The administration, Congress and OFHEO are working toward achieving an effective compromise that would give the new regulator authority to reduce non-mission-related assets and thereby lessen the risks they present.

Supporting the U.S. mortgage market and promoting affordable housing is a mission that the FHLBanks and Enterprises share. In addition, the Enterprises are charged with responding appropriately to private capital markets and providing stability and liquidity to the secondary mortgage market. In that latter area, they have been successful as investor demand and innovation have been strong. However, only 30 percent of Enterprise portfolios support affordable housing. Over half their portfolios are investments in their own guaranteed mortgage-backed securities, which increase profits, but only a small portion is needed to support stability and liquidity.

In my third tour of duty in government — the first at the Pension Benefit Guaranty Corporation, then the Social Security Administration, and now OFHEO — I know how important it is to get legislation right. We have that rare opportunity now. It is my hope that Congress will act in everyone’s best interests and pass this vital legislation. A stronger regulatory regime, as proposed by the Congress and supported by OFHEO, the administration, and the Enterprises, will strengthen Fannie Mae, Freddie Mac and the FHLBanks so that they can better fulfill their important mission of supporting the U.S. mortgage market and affordable housing.

Lockhart is the director of the Office of Federal Housing Enterprise Oversight (OFHEO).