The regulator of mortgage finance giants Fannie Mae and Freddie Mac detailed plans Monday to begin contracting their business while merging their securitization operations.

Federal Housing Finance Agency acting director Edward DeMarco said the two, rescued by the government in 2008 in a $180 billion bailout after the housing market collapse, needed to begin reducing their dominance of the market as private financing makes a comeback.

DeMarco said the housing industry is strengthening, helped by record low interest rates, and that Fannie and Freddie are now generating operating profits.

That makes conditions ripe for the FHFA to begin moving to shrink them and help restructure the secondary market for mortgages and mortgage securities -- thousands of mortgages packaged into bonds and sold to investors.

One effort planned for this year is to raise the fees they charge to mortgage lenders for guaranteeing their loans, to encourage private capital to return to that part of the market, reducing the market's near-complete dependence on the two.

"The idea is that at some point the increases in guarantee fees will encourage private capital back into the market. We are not there yet, but in conversations with market participants, I think we are getting closer."

Secondly, Demarco wants to take the operations of the two -- which package and market millions of mortgage loans as securities, making them the dominant players in that massive market -- and combine them into one separate entity.

"There must be some updating and continued maintenance of the enterprises' securitization infrastructure, and to the extent possible, we should invest taxpayers' dollars to this end once, not twice," he said.

The new separate unit, at first owned by Fannie and Freddie, would handle the business, adapting to the needs of and changes in the securitization market.

"However, 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," he said.

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