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Fannie, Freddie to Hand Securitization Business to New Firm

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Fannie Mae and Freddie Mac will form a joint venture for securitizing home loans that could end up replacing the two government-controlled mortgage finance giants, their regulator 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, told the National Association for Business Economics.

Fannie Mae and Freddie Mac, which help finance about two-thirds of new U.S. homes loans, were seized by the government in 2008 as mortgage losses mounted. They have drawn nearly $190 billion from the U.S. Treasury to stay afloat.

DeMarco said the goal was to build a single infrastructure to support the mortgage credit business that could be privatized, merged into the government or function as a utility. The two companies would have to abandon their separate systems.

"We are on a path to replace the outdated proprietary operational systems of Fannie and Freddie," DeMarco told reporters on a conference call ahead of his speech. "It could be turned to some form of a market utility."

Democrats and Republicans on Capitol Hill agree that Fannie Mae and Freddie Mac should eventually be wound down, but have failed to find common ground on what should replace them. DeMarco's plan provides an interim structure for some of their business, but the ultimate decision remains in Congress' hands.

The new company will be structured as a joint venture that is owned by Fannie Mae and Freddie Mac, DeMarco told reporters as he laid out FHFA's plans for 2013.

He said the new venture was not expected to begin securitizing loans this year. Instead, the focus will be on creating the business and hiring staff. The company will have its own chief executive and board.

"It can achieve some economies of scale to hopefully reduce the cost to the taxpayers," said Mark Calabria, director of financial regulation studies at the Cato Institute. DeMarco "is trying merge the two companies, lay the groundwork for something different and ultimately nudge Congress to work on reform."

Fannie Mae and Freddie Mac do not make loans. Instead, 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.

The two companies have helped ensure a liquid mortgage market, a role that would fall to the new joint venture.

Shrinking Fannie and Freddie

DeMarco also said Fannie Mae and Freddie Mac would have to shrink their multifamily home loan business by 10 percent.

In addition, they will have to try and complete transactions that do not rely on a full government backstop. FHFA will require the companies to sell at least $30 billion in mortgage-backed securities in 2013 in which the private sector would bear some of the risk of losses.

"What we're looking for is to have some portion of the risk sold off to private owners and that way reduce the exposure of the taxpayer," DeMarco said.

The companies will also be required to reduce the less liquid portion of their mortgage portfolios by 5 percent next year on top of an existing mandate that requires them to shrink their overall portfolios by 15 percent each year.

Fannie Mae and Freddie Mac suffered years of losses after the U.S. housing bubble burst, but have returned to profitability thanks to an improving housing market and success in reducing their portfolios of poorly performing loans.

Even though the loans they have backed recently are performing well, DeMarco noted that the market was still "reliant on federal support, with very little private capital standing in front of the federal government's risk exposure."

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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