The U.S. Mortgage Bankers Association said on Wednesday it will ask Congress to transform mortgage lenders Fannie Mae, Freddie Mac into several smaller, privately held companies that would issue mortgage securities with a government guarantee.

The proposed framework from the industry group would give successor entities to Fannie Mae and Freddie Mac the authority to create securities backed by certain types of mortgage.

The new companies would guarantee the securities against defaults on underlying mortgages and pay fees into a federal insurance fund that would make good on interest and principal payments to bondholders if the companies were unable to make them.

The government has an important, limited role to play to ensure a stable flow of funds for mortgages. said Michael Berman, MBA's vice chairman and chairman of the Council on Ensuring Mortgage Liquidity.

The MBA plan calls for government agencies, rather than the new companies, to assume the mission of promoting affordable housing that Congress has long assigned to Fannie and Freddie.

The number of new companies would be initially limited to two or three, the MBA said.

Fannie Mae and Freddie Mac were not immediately available for comment.

(Reporting by Chakradhar Adusumilli in Bangalore and Chris Sanders in New York; Editing by Dan Lalor and Jeffrey Benkoe)

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