In December 2006, Fannie Mae restated its financials for 2001 through June 30, 2004, correcting $6.3 billion in earnings overstatements. Freddie Mac’s own accounting problems were revealed in 2003; the company had understated earnings by $5 billion to smooth out volatility in profits.

But long before the accounting scandals, Fannie Mae and Freddie Mac were viewed unfavorably by some industry participants, who see the GSEs’ privileges—such as an exemption from state and local taxes (except for property taxes), and conditional access to a multi-billion dollar line of credit from the U.S. Treasury—as anti-competitive. To these critics, the GSEs pose a “systemic risk” to the health of the U.S. economy due to the size of their investment portfolios, which total a combined $1.4 trillion.

In a meeting of the Independent Community Bankers of America on March 6, Federal Reserve Chairman Ben Bernanke told the audience that the GSEs’ portfolios should be almost exclusively restricted to affordable housing.

“The size and potentially rapid growth of GSE portfolios … raise substantial systemic risk concerns,” Bernanke said. “A straightforward means of anchoring the GSE portfolios to a clear public mission would be to require Fannie and Freddie to focus their portfolios almost exclusively on holdings of mortgages or mortgage-backed securities that support affordable housing.”

This sentiment is echoed by the Office of Federal Housing Enterprise Oversight (OFHEO), which ensures that the GSEs are adequately capitalized and operating in a financially sound manner. “We believe that their portfolio should be refocused on their mission, which includes affordable housing and stability and liquidity of the secondary mortgage market,” said OFHEO Director James Lockhart.