The regulator for Fannie Mae (FNM) and Freddie Mac (FRE) will lay out three potential roles for the future of the mortgage finance giants Wednesday in testimony before a House panel.

Federal Housing Finance Agency Director James B. Lockhart said the government-controlled companies could be reconstituted as liquidity providers of last resort for the secondary market for mortgage-backed securities, or MBS. They could be cast as guarantor or catastrophic risk insurer of MBS. Or they could direct subsidies to decrease the cost of mortgage credit for certain borrowers.

"It can be argued that three specific roles remain for the government or a special government-linked entity," Lockhart will say, according to prepared testimony he will give before the House Financial Services Subcommittee on Capital Markets. "Ultimately, the roles chosen for any government-linked entities going forward will have implications for their range of activities and institutional structure."

Lockhart doesn't favor any particular model or structure for the companies, but does advocate that policy makers adhere to certain principles. For example, he argues there should be a clear delineation between the federal and private sector roles in the secondary mortgage market. Any federal risk should be explicitly stated and quantified actuarially.

"The old hybrid model of private, for-profit ownership underwritten by an implicit government guarantee allowed the enterprises to become so leveraged that they posed a large systemic risk to the U.S. economy," Lockhart says, according to his prepared testimony.

Lockhart said he was opposed to nationalizing the firms "because government insurance programs are particularly high-risk and rife with moral hazard."

-Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com