The recent accounting scandals at the two government-sponsored companies have heightened the Bush administration's concern that they pose a potential risk to U.S. financial markets if they fail, Snow said in testimony to the Senate Banking Committee.

Because so many big financial institutions hold large amounts of debt issued by Fannie Mae and Freddie Mac, a crisis at or failure of either of them could reverberate through the markets, he said.

Snow's testimony came a day after Fed Chairman Alan Greenspan called for Congress to limit the companies' combined $1.5 trillion portfolios.

The recent troubles at Fannie Mae and Freddie Mac "reinforce concerns over the systemic risks posed" by the companies, Snow said. He said the problems further highlight the need for a new regulatory regime "to ensure that our housing finance system remains a strong and vibrant source of funding" for home buyers.

The administration is troubled that neither company filed financial statements "that can be relied upon," Snow said.

Some lawmakers have been seeking stricter oversight of Fannie Mae and Freddie Mac and possible limits on their size after accounting scandals at the two biggest players in the multitrillion-dollar home mortgage market, whose stock is widely traded.

Snow stopped short of urging Congress to impose mandatory limits on the companies' portfolios, as Greenspan had suggested. He said the new regulatory agency should have the power to compel the companies to sell off holdings.

"I don't think there would be negative effects on the mortgage market" if the government were given broad new power over the operations of the two companies, Snow said.

The statements by Greenspan and Snow lent support to the effort by Republicans in Congress to tighten controls on Fannie Mae and Freddie Mac, which hold or guarantee more than 45 percent of all mortgage loans in the country.

Legislation recently proposed would set up a regulatory agency with the power to compel the companies to sell off any assets deemed not to be in line with their mission of making homeownership more widely available.

The measures would not have Congress set binding limits on the size of the companies' portfolios. The companies also have issued $1.8 trillion in debt.

"Without restrictions on the size of (their) balance sheets, we put at risk our ability to preserve safe and sound financial markets in the United States, a key ingredient of support for homeownership," Greenspan testified.

Portfolio restrictions would not affect mortgage rates for homeowners because so many big banks and other lenders compete with Fannie Mae and Freddie Mac, Greenspan said, citing a Fed study. While the companies' stock prices had fallen as a result of the accounting turmoil, he noted that "mortgage markets have functioned well."

One committee member, Sen. Charles Schumer, disputed that notion. "It almost defies belief that mortgage rates won't go up," Schumer, D-N.Y., told Greenspan. "On this issue, we don't see eye to eye."

On Wednesday, the director of the Office of Federal Housing Enterprise Oversight, Armando Falcon, told a House panel that falsified signatures had been found in Fannie Mae's ledgers from 1999 through 2002 and that the company has a practice of choosing the most desirable home mortgages for its own account and selling the less-coveted loans as securities.

Congress created the companies to inject money into the home-loan market, keeping mortgage rates lower. They buy mortgages from banks and other lenders and bundle the loans into securities for sale to investors worldwide.

Federal regulators last year accused Fannie Mae of accounting problems and earnings manipulation to meet Wall Street targets. The Securities and Exchange Commission ordered the company to restate earnings back to 2001, a correction that could reach an estimated $11 billion.

In mid-2003, three top executives at Freddie Mac were forced out and the company was found to have misstated earnings by $5 billion for 2000-2002.

-- Marcy Gordon