The accounting scandal at Fannie Mae, following closely on the heels of the woes of Freddie Mac, has set off contentious congressional hearings and become a leading topic of Washington gossip.

With the reelection of President Bush and increased Republican majorities in the Congress, an environment for change has replaced the complacency of the last decade. There will probably be GSE legislation early next year.

The best answer to the housing GSEs, which is the privatization of Fannie, Freddie and the Federal Home Loan banks, remains politically improbable. Legislation will focus on bringing all housing GSEs under a single world-class regulator.

The legislation should:

Create a new, single regulator for Fannie, Freddie, and the 12 Federal Home Loan banks, as proposed by the administration and in last spring's Senate Banking Committee bill. This agency would replace the Office of Federal Housing Enterprise Oversight and the Federal Housing Finance Board, both of which have regulatory domains too narrow to make sense.

The new regulator would have oversight responsibility for the $5 trillion housing GSE sector, which provides the preponderance of the financing for the world's largest credit market. Next to the U.S. Treasury, these 14 entities are collectively the most important and widely held issuers of fixed-income securities in the world.

The new regulator's understanding of the sector as a whole could be applied to individual GSEs in context and to the overall trends in the housing finance system.

Instruct the new regulator to foster as competitive a GSE sector as possible. The secondary mortgage market, dominated by Fannie and Freddie, is probably the least competitive financial sector in America. Leveling the regulatory playing field for the 14 GSEs would increase price competition, innovation, and customer choice, channeling to the public the immense economic benefits of GSE status.

End government appointment of directors to Fannie, Freddie, and the Home Loan banks. The new GSE regulator should have no involvement in appointing them, since their fiduciary duty is to the shareholders. President Bush has already declined to appoint directors to the boards of Fannie and Freddie. As for the Home Loan banks, the appointment of directors by their current regulator is, as the GAO and others have pointed out, an obvious and undesirable conflict.

Address receivership. The debt of all housing GSEs has grown exponentially, far faster than the mortgage market or the economy, for more than a decade. This reflects the fact that bond investors who believe the government will protect them provide little market discipline.

The administration has consistently maintained that legislation must have "effective receivership language" so investors in GSE debt will exert more market discipline.

There are two ways to achieve this. If you think GSEs most resemble banks, legislation should provide for bank-like regulatory receiverships. An alternative, since GSEs take no deposits from the public, is to view them as debt-issuing financial corporations.

Legislation could address receivership simply by providing that the GSEs become subject to the Bankruptcy Code, like other issuers of debt. This would be "effective receivership language" of the most straightforward kind.

Instruct the new regulator and the Treasury to recommend whether the statutory lines of credit to Fannie, Freddie, and the Home Loan banks should be phased out. In memorable testimony during the Clinton administration, a Treasury under secretary suggested that this special pipeline to the taxpayers' wallet be terminated. This riled the GSEs, and nothing changed. Almost five years have passed since then; GSE debates are much less surprising and better understood by the markets. It is time to reconsider these lines of credit.

Finally, once in business the new regulator should make the problems created by FAS 133, "Accounting for Derivative Instruments and Hedging Activities," a top priority. Without making excuses for Fannie and Freddie, one can point out that the distortions this standard created have been central to the accounting scandals and disputes at both GSEs.

Alex J. Pollock is a resident fellow at the American Enterprise Institute.