The recommendations came in a new strategic plan for Fannie and Freddie submitted to lawmakers Tuesday by the Federal Housing Finance Agency, which has overseen the companies since they were put into government conservatorship in 2008 to avoid their failure.
Fannie and Freddie have almost single-handedly kept the housing finance market afloat in recent years. Together, they guarantee about $100 billion a month in mortgages, an amount that represents about 75% of all new home loans.
The FHFA wants to jump-start stalled efforts in Washington to find an endgame for Fannie and Freddie, which are 80% owned by taxpayers and have received about $183 billion in bailout money.
The Obama administration and Congress want to shut down Fannie and Freddie and reduce the government's role in the mortgage market, which has expanded dramatically since the financial crisis.
But there is no consensus on exactly how to do it amid concern that acting too soon could damage the still-reeling housing market.
In fact, the administration and some Democrats in Congress have been pushing Fannie and Freddie to do more to help struggling homeowners by reducing their mortgage payments and even lower the amount owed on their loans.
The FHFA's acting director, Edward J. DeMarco, has rebuffed calls for principal write-downs, saying they would result in bailout losses to taxpayers.
The latest plan for Fannie Mae and Freddie Mac doesn't anticipate that they would continue "as they existed before conservatorship," the FHFA said.
"And though [they] may well cease to exist at some point in the future, at least as they are known today, the country's $10-trillion, single-family mortgage market will not go away," the agency said. "Therefore, an orderly transition to a new structure is needed."
DeMarco laid out three goals: build a new infrastructure for the secondary mortgage market, "gradually contract" Fannie's and Freddie's presence in the market, and continue efforts to reduce foreclosures.
He warned that simply shutting down Fannie and Freddie without new ways to encourage private investment in the mortgage market would drive up interest rates and limit the availability of loans.
About a year ago, the administration proposed to shut down Fannie and Freddie over five to 10 years. The plan presented three options for Congress to consider: a limited government guarantee of some mortgages, an emergency backstop role only during recessions, and a nearly complete pullback of the federal government from the mortgage market.
Treasury Secretary Timothy F. Geithner said this month that the administration expects to provide more details of its plans this spring.
"As we made clear last year, our immediate obligation is to repair the damage to homeowners, the housing market and neighborhoods caused by the crisis," Geithner said.
Rep. Scott Garrett (R-N.J.), who chairs a House subcommittee overseeing Fannie and Freddie, said he welcomed DeMarco's plans.
"The housing sector will continue to be a drag on our economic recovery until we end the ongoing bailout of Fannie and Freddie and replace the existing government-backed mortgage-finance system with a purely private-market solution," Garrett said.