Mortgage behemoth Fannie Mae's accounting and legal horror show -- which hit the front pages last week with the ouster of chairman and CEO Franklin D. Raines and chief financial officer Timothy Howard -- is hardly over.

The year 2004 may have been Fannie's version of what Britain's Queen Elizabeth II once described as her "annus horribilis," but 2005 could be a close runner-up. Fannie faces potentially costly and distracting shareholder class action suits, investigations by the SEC and the Justice Department, plus new promises by the Republican-dominated Congress and the White House to finally rein in the corporation from its high-flying, free-spending ways.

Once a politically-fearsome lion on Capitol Hill, accounting scandal-ridden Fannie Mae is likely to behave more like a lamb next year. Not only has the SEC's documentation of serious accounting malpractices put Fannie in unusual financial straits -- forcing the corporation to restate its earnings for the past four years and report a $9 billion derivatives loss on its books. But Fannie must now follow the marching orders of the regulatory agency it once mocked and derided -- the Office of Federal Housing Enterprise Oversight (OFHEO) -- and raise billions of dollars in additional capital.

With its designation of Fannie as significantly undercapitalized, OFHEO suddenly has the power to restrict Fannie's growth in its mortgage portfolio, and could even step in and name a conservator if it thought the corporation was spinning out of control. As a result, Fannie is not likely to be as aggressive a presence in the home mortgage market in 2005 as it has been in the past. That, in turn, could mean that there will be moderately less capital available to fund new mortgages, and interest rates on new loans to consumers could rise slightly.

Meanwhile, Fannie's year ahead on Capitol Hill looks grim. The Bush administration, along with Federal Reserve chairman Allan Greenspan, have long been critics of Fannie's government-subsidized growth and high profits. Critics also have worried that a financial crisis at Fannie, with nearly $1 trillion at stake, could trigger seismic repercussions in the banking, housing and international capital markets.

By early Spring 2005, according to the House banking committee, legislation should be well underway to create a new, more powerful oversight agency for Fannie, Freddie Mac and the Federal Home Loan Banks.

Whereas as late as this past October Fannie had passionate defenders among House and Senate Democrats -- plus a handful of Republicans -- those ranks were sharply depleted after the SEC found Fannie's hedge accounting noncompliant with federal rules. Democrats, especially ranking House banking committee minority member Rep. Barney Frank (D-Mass.), had helped stymie the Bush administration's efforts to create a new regulator for over a year, arguing that Fannie's housing mission could be compromised by too many restrictions. But now Frank is openly critical of Fannie's former top managers, and is not likely to rally his party colleagues to fend off the Republicans in the new year.

The regulatory agency that emerges from 2005's legislation is almost certain to approximate Fannie's -- and Freddie's -- worst case scenario. The regulator will likely have the power to scrutinize virtually every action the corporations take, and will almost certainly have the legal authority to put them both in receivership.

The bottom line here: American home buyers might end up paying modestly higher interest rates on their loans, but U.S. taxpayers should be better insulated from a costly bailout should Fannie's and Freddie's future financial positions totally unravel.