Fannie Mae and Freddie Mac will build a new joint company for securitizing home loans as a stepping stone toward less government involvement in the mortgage market, the regulator of the U.S. government-controlled firms said on Monday.
"The overarching goal is to create something of value that could either be sold or used by policymakers as a foundational element of the mortgage market of the future," Edward DeMarco, acting director of the Federal Housing Finance Agency, said in remarks prepared for delivery to an economic conference.
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Fannie Mae and Freddie Mac, which were bailed out by the government in 2008, help finance about two-thirds of new U.S. home loans. DeMarco is seeking to shrink their footprint and reduce risks to the taxpayers that support the mortgage giants.
Since they were seized by the government, the companies have drawn nearly $190 billion from the U.S. Treasury to stay afloat.
By creating a new securitization company, FHFA intends to pave the way for a single securitization platform, forcing Fannie Mae and Freddie Mac to abandon their current separate systems. DeMarco said the goal is to build a single infrastructure to support the mortgage credit business.
The new company will be structured as a joint venture that is owned by Fannie Mae and Freddie Mac, DeMarco told reporters on a conference call to discuss FHFA's plans.
He said the new joint venture is not expected to begin securitizing loans next year. Instead, the focus will be on creating the business and hiring staff.
In the long term, he expects policymakers will ultimately decide how the securitization platform is operated, and whether it should be privatized.
"We are on a path to replace the outdated proprietary operational systems of Fannie and Freddie," DeMarco told reporters. "It could be turned to some form of a market utility."
Fannie Mae and Freddie Mac do not directly make loans. They provide financing to banks and lenders by purchasing mortgages, which they either keep on their books or package as securities which they then sell to investors with a guarantee.
DeMarco, in laying out FHFA's goals for 2013, said he also plans to start reducing Fannie Mae and Freddie Mac's role in the housing finance system by shrinking their business by 10 percent in the loan market for multifamily homes.
The companies will also be required to reduce the less liquid portion of their portfolio of mortgages by 5 percent next year. This goal comes on top of an existing mandate that requires Fannie and Freddie to shrink their investment portfolios over time and turn over profits to taxpayers. (Reporting by Margaret Chadbourn; Editing by Tim Ahmann and David Gregorio)