The Federal Housing Finance Agency (FHFA), regulator of the government-backed mortgage firms- Fannie Mae and Freddie Mac, announced Monday, March 4 that operations of the two companies will be combined to form a separate entity that will look after securitized home loans.
According to FHFA, the operations of Fannie and Freddie are being consolidated in an effort to reduce government involvement in the mortgage market of the U.S. The "new business entity" will package home loans into mortgage-backed-securities, which will be sold to private investors, reports The New York Times.
The announcement was made in a conference of the National Association for Business Economics. It was declared that the new company will have a completely detached line of command, complete with a CEO and board chairman, independent of Fannie and Freddie. It would also be located in a completely separate location.
The new company will be structured as a joint venture that is owned by Fannie Mae and Freddie Mac, reports USA Today.
"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 J. Demarco, acting director of the Federal Housing Agency said in a statement.
According to RawStory, Demarco also asserted that since private mortgage funding is still on the comeback track, it was important for Fannie and Freddie to streamline operations and reduce their dominance in the market.
The government had decided to slowly dissolve Fannie and Freddie to transfer mortgage activity to the private sector in 2011. However, no dissolving steps were taken over the years. Now with the announcement of the merging operations and introduction of the new entity, this might be a small step towards the dissolving plan, reports USA Today.
"We are on a path to replace the outdated proprietary operational systems of Fannie and Freddie. 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," Demarco said in the statement.
Demarco also stated that Fannie and Freddie have to scale down their multifamily home loan business by 10 percent. They also have to reduce 5 percent of their less liquid mortgage portfolios by 2014, reports Chicago Tribune.
Fannie and Freddie were bailed out by the government when the housing market crashed in 2007. The companies received an aid of around $170 billion of which they have repaid just around $52.3 billion.
However, both Fannie and Freddie have reported steady operating profits. The FHSA now requires the two companies to sell mortgage backed securities worth $30 billion in 2013.
