WASHINGTON — Edward DeMarco, acting director of the Federal Housing Finance Agency, all but begged lawmakers on Tuesday to begin the process of reforming the nation's housing finance system, saying Fannie Mae and Freddie Mac have been in conservatorship for far too long.

"I need Congress and the administration to agree on a legislative path that defines the role of the government in the mortgage market so we can know what we are building towards as we build for the future," said DeMarco in testimony before the House Financial Services Committee. "It is unprecedented that two enormous financial institutions such as these have been in conservatorship for more than four and a half years."

The two mortgage giants were seized by the government more than four years ago, but little progress has been made in efforts to implement housing finance reform, including assessing the proper role of the government in the mortgage market.

The Obama administration has said its preferred approach is to wind down Fannie and Freddie, but outside of a white paper listing three potential fixes, it has not provided details on how that should happen. Lawmakers, too, continue to discuss the issue, but have taken few steps so far to address it.

That has largely left FHFA to move forward on its own. DeMarco announced a plan earlier this month that would require Fannie and Freddie to create a new, independent business entity designed to securitize mortgage-backed securities. The plan is meant to be flexible and help prepare the secondary mortgage market for a world without the government-sponsored enterprises.

"I think this could serve as a building block for Congress to realize a future mortgage market," DeMarco told lawmakers. "I spent a lot of time thinking as conservator of two companies that the administration says it wants to wind down, how do I invest taxpayer dollars in continuing to develop and strengthen the underlying infrastructure of their securitization business using taxpayer money when we are expected ultimately to wind these things down?"

DeMarco stressed this was not a consolidation of the two enterprises, but rather an attempt to create a platform that functions like a market utility instead of rebuilding Fannie and Freddie's infrastructure.

"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," said DeMarco.

He said he anticipates that the utility would be structured in such a way that it could provide a federal guarantee to mortgage-backed securities, but does not necessarily have to.

"They would not presumably be the guaranteed entity providing that guarantee for the government,' said DeMarco. "This is the operational platform under which the securities would be produced and sold into the marketplace and because it would be done as a market utility that consistency would make the market more liquid."

DeMarco has said from the outset that the agency expects this to be a multiyear effort.

"I would like to see this transition be done within 5 years, but beyond that it would be very hard to put a strict timeline on something when you are still in the design phase trying to scope out what it is and you know it's a pretty material undertaking," said DeMarco.

The platform is one of three main priorities the agency has set for itself in 2013, including shrinking Fannie's and Freddie's presence in the marketplace while winding down certain parts of its operations and maintaining foreclosure prevention activities.

Given an uncertain future and the desire to have private capital re-enter the market, the enterprises' presence should be reduced gradually over time, DeMarco said.

Last year, the agency increased guarantee fees twice on new mortgages to around 50 basis points, double the amount of fees prior to conservatorship.

"A key motivation behind increasing enterprise guarantee fees is to bring their credit risk pricing closer to what would be required by private sector providers," said DeMarco. "The idea is that at some point the increases in guarantee fees will encourage private capital back into the market."

DeMarco said he would be supportive of further increases to the fee, nothing that the current amount is within "striking distance" of market prices.

"I think we are getting closer," said DeMarco.

Additionally, DeMarco said the agency has set a target of $30 billion of unpaid principal balance in credit risk sharing transactions this year for both Fannie and Freddie.

The amount is only a sliver of the entire mortgage market, but DeMarco hopes based on the results of this year to gradually increase the target.

Currently, Fannie and Freddie guarantee more than $5 trillion in mortgages. Under the plan, FHFA is hoping to sell of a portion of the credit risk to private investors in the event of a default taxpayers would not be fully on the hook.

"It's not just about building for the future as important as that it is," said DeMarco. "Fannie and Freddie are operating a combined $5 trillion book of business we've got to continue to invest infrastructure for that business."

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