A new business entity intended as an eventual successor to Fannie Mae and Freddie Mac will be launched this year by the Federal Housing Finance Agency (FHFA), the acting director of the agency has announced.

The new entity is planned to gradually take over the mortgage securitization functions of Fannie Mae and Freddie Mac as the two government-supported enterprises (GSEs) are wound down. The new operation is intended to encourage a greater role for private capital in the residential mortgage market than currently exists.

"We believe that setting up a new structure that is separate from the two companies is important for building a new secondary mortgage market infrastructure," said Edward DeMarco, FHFA acting director. "Our objective, as we stated last year, is for the platform to be able to function like a market utility, as opposed to rebuilding the proprietary infrastructures of Fannie Mae and Freddie Mac."

The new entity will initially be owned and funded by Fannie Mae and Freddie Mac, which are themselves in government conservatorship, and take over some of their current functions. At the same time, DeMarco said he expects it will be headed by a CEO and chairman of the board who are independent from the two GSEs and will have offices physically separate from those of Fannie and Freddie.

Some Fannie, Freddie operations to be modified

He said that Fannie and Freddie's current operations are outmoded and not effective at adapting to market changes, attracting private capital, collecting data or lowering barriers to market entry. He suggested the process will involve upgrading those functions in such a way they can be incorporated into the new entity as it takes over.

"The overarching goal is to create something of value that could either be sold or used by policy makers as a foundational element of the mortgage market of the future," DeMarco said. "We are designing this to be flexible so that the long-term ownership structure can be adjusted to meet the goals and direction that policymakers may set forth for housing finance reform."

There has been strong sentiment among federal lawmakers for getting rid of Fannie Mae and Freddie Mac ever since the two agencies, which were privately owned but government-affiliated, incurred massive losses in the housing crash that required that they be bailed out by taxpayers. At the same time, there have been questions over what would replace them, given their role in guaranteeing residential mortgages and keeping them affordable. The planned entity would be that replacement.

Published on October 27, 2010