By Al Yoon

NEW YORK (Reuters) - The regulator of Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) said on Monday some of the accounting methods used by the biggest U.S. home finance companies could overstate their financial strength.

"Fair value" accounting could in some cases lead to an "inappropriate" adjustment in core capital used to assess capital adequacy, according to guidance published by the Office of Federal Housing Enterprise Oversight.

The two government-sponsored enterprises have also been inconsistent with how they apply the rule, analysts said.

The GSEs' capital adequacy helps determine how much they can invest in the mortgage market. The ailing housing market has led banks and lawmakers to increasing reliance on the companies, which analysts expect will have to raise new capital to meet regulatory minimums and grow investment portfolios.

"OFHEO must consider whether financial statement information is suitable for regulatory purposes, and when it is not, must take this into consideration when assessing safety and soundness, including capital adequacy," the regulator said in its guidelines.

New rules which require companies to value assets at current prices took full effect this year. Also known as "mark-to-market" accounting, the rule has been blamed for exaceberating the credit crisis by forcing companies to use complex valuation methods for assets where there is little actual trading to identify market prices.

Fannie Mae and Freddie Mac sustained hits of $6.4 billion and $17 billion, respectively, in fair value of net assets in the fourth quarter amid lower values of guarantees they provide on mortgage-backed securities. The difference suggests Freddie Mac assumed much cheaper valuations on guarantees than Fannie Mae, according to Barclays Capital.

"It is important that Fannie Mae and Freddie Mac apply fair value in a sound and consistent manner, OFHEO Director James Lockhart said in a statement.