The Treasury Department announced the changes Friday in an effort to deal with concerns that the companies could at some point exhaust the federal support they were guaranteed when they were taken over by the government in September 2008 during the financial crisis.
The two firms would have to turn over all profits they earn every quarter. They would also be required to accelerate the reduction of their mortgage holdings to hit a cap of $250 million by 2018, four years earlier than planned.
Under the new arrangement, the firms' portfolios can be no larger than $650 billion each at the end of this year.
"With today's announcement, we are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac while continuing to support the necessary process of repair and recovery of the housing market," said Michael Stegman, who serves as Treasury Secretary Timothy Geithner's counsellor on housing policy.
The government rescued Fannie and Freddie in September 2008 when massive losses on risky mortgages threatened to topple them. The Treasury has pumped nearly $188 billion into the companies. In return for that support, the government has received senior preferred shares of stock that pay a 10 per cent dividend.
Currently, Fannie and Freddie make dividend payments to the Treasury every quarter. That has forced them to borrow money from the government and use that money to repay the government in periods when they didn't turn a large enough profit to cover the dividend payments.
The changes announced Friday are aimed at avoiding the threat that Fannie and Freddie could one day exhaust their Treasury support because they did not generate enough profits to pay back their dividends.
Under the new arrangement, the government will simply take all the profits that the firms make in any quarter as a dividend payment. The government will not require a dividend payment in periods when the firms run a loss.
So far, Fannie and Freddie have paid nearly $46 billion in dividends.