Merger of Fannie, Freddie's bond units proposed

[March 05, 2013]  WASHINGTON (AP) -- The federal regulator who oversees Fannie Mae and Freddie Mac is putting forward a plan to combine the two mortgage giants' divisions that issue billions of dollars in securities backed by home loans.

The plan announced Monday by Edward DeMarco, acting director of the Federal Housing Finance Agency, is part of efforts to overhaul Fannie and Freddie with the goal of shrinking the government's role in the mortgage finance system. The government rescued the companies in 2008 with $170 billion in aid, the costliest bailout of the financial crisis.

So far, the companies have repaid a combined $52.3 billion.

DeMarco said the new entity, separate from Fannie and Freddie, could eventually be sold or used as the foundation for a restructured mortgage market.

The Obama administration unveiled a plan in 2011 to slowly dissolve Fannie and Freddie. The proposal would remake decades of federal policy aimed at getting Americans to buy homes by creating a system that relies far more on private money. Exactly how far the government's role in mortgages would be reduced was left to Congress to decide. Several proposals are before Congress but none has yet been acted on.

Freddie, based in McLean, Va., and Washington-based Fannie together own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans. Those loans are worth more than $5 trillion. Along with other federal agencies, they back roughly 90 percent of new mortgages.

DeMarco announced the plan in a speech to a conference of the National Association for Business Economics. He said the combined entity would have its own CEO and board chairman who would be independent of Fannie and Freddie. It would be physically in a separate location.

Initially the entity would be owned and funded by the two companies, DeMarco said. However, he said, the goal "is to create something of value that could either be sold or used by policymakers" as a foundation for a restructured mortgage market.

"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," he said.

The housing market has started to recover more than five years after the bubble burst. Home sales are up from a year ago, helped by a limited supply and record-low mortgage rates. Builders are more confident and have started to construct more homes. And home prices are showing consistent gains.

Last week, Freddie reported that it earned $4.5 billion from October through December, its fifth straight profitable quarter. The company credited fewer delinquencies on home loans and rising home prices for the gains. Freddie said it paid a dividend of $1.8 billion to the U.S. Treasury for the fourth quarter and requested no additional federal aid.

[Associated Press; By MARCY GORDON]

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