Under the new arrangement, the firms' portfolios can be no larger than $650 billion each at the end of this year.
Industry groups, including the American Bankers Association and the Mortgage Bankers Association, were generally supportive of the administration's action. Republicans in Congress, who have often clashed with Democrats over housing policies, were critical, saying the changes don't answer the more important need to overhaul how the government promotes home ownership.
"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 counselor 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 percent 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.