The Senate Banking Committee approved a bill to tighten regulatory controls of Fannie Mae and Freddie Mac that is expected to be voted on by the entire chamber as early as September, according to Dow Jones Newswires.

While it’s favored by the Bush Administration, the bill reportedly contains elements that call its future into question. Some Republicans raised questions over a provision that would reduce the companies’ combined $1.5 trillion investment portfolios if either poses a risk to the U.S. financial system, the newswire said. Still, widespread accounting problems at the mortgage giants have raised serious concern over whether current checks over Fannie and Freddie are enough.

Last December, the Securities and Exchange Commission ordered Fannie Mae to restate its financials from 2001 through mid-2004, reducing the company’s earnings by about $9 billion. In March, the company announced that it was complying with the commission’s request and that it wouldn’t be able to file a timely 10-K. The SEC sought to eliminate its use of hedge accounting for derivatives transactions and noted the company’s noncompliance with a standard relating to deferred purchase-price adjustments.

In December 2003, federal regulators ordered Freddie Mac to pay a record $125 million fine for alleged management misconduct and violation of its public trust in connection with its $5 billion earnings misstatement.

To handle mounting risk at Fannie and Freddie, the bill approved by the banking committee reportedly proposes that the Office of Federal Housing Enterprise Oversight, the current regulator, be replaced with a regulator that would have the increased power to force the companies to reduce their assets. The regulator would also be empowered to raise capital requirements and set up a “receivership mechanism” if the companies’ liabilities exceed their assets or if their bills aren’t paid on time.

A Freddie Mac spokesperson quoted by Dow Jones objected to the bill’s portfolio restrictions, which she said would effectively limit the company to mortgage securitization, commenting that the bill goes “well beyond regulatory reform.”

Senator Christopher Dodd and a few other Democrats who opposed the bill in the committee were hopeful that lawmakers could resolve any differences during their August recess negotiations, according to The Wall Street Journal.

A bill friendlier to Fannie and Freddie in the House has reportedly stalled over a low-income-housing provision. The White House and Federal Reserve Chairman Alan Greenspan also oppose that version, Dow Jones reported.

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