Fannie Mae is in the midst of a loan quality initiative and has taken steps to improve its internal controls in what continues to be a challenging housing market, President and CEO Michael Williams said Wednesday during the HousingWire REthink Symposium. Its story, he said, is "a tale of two books." The first, or legacy book, covering 2005 to 2008, is from the peak of the housing market when unemployment rates were hovering around 5% to 5.5% and home loans were easy to come by. The second book, which began in 2009, was built in the wake of the financial crisis, amid rising unemployment and declining interest rates. That second book, he said, represents a "high quality, strong credit book." The economy, however, continues to struggle. The housing finance system is predicted to be a $1 trillion market in 2011, down from $1.5 trillion in 2010. "As you look at the economy, there are clearly signs that the economy is improving," Williams said, referring to strong corporate profits and nominal job growth. Although challenges remain for the housing sector, including a sustained high unemployment rate that depresses demand for homes, along with continuing home price declines. In addition, foreclosures are expected to stay relatively high for awhile, he said. Fannie reported a loss of $8.7 billion for the quarter ended March 31, which included a $2.2 billion dividend payment to the Treasury Department. The loss narrowed from $13 billion one year ago. Williams attributed most of the first-quarter losses to that first credit book. "We need to manage our credit book — our old legacy book very vigorously," he said. But that is not in conflict with assisting distressed homeowners. "Helping people to avoid foreclosure is a good thing," Williams said. The government-sponsored enterprise, working with servicers, has been involved in nearly 800,000 loan workouts since 2009. Fannie is the leading provider of liquidity in U.S. housing, having provided nearly $1.6 trillion to the mortgage market since January 2009. Of that, about $1.5 trillion went into the single-family market and about $40 billion went into the multifamily market. "One of the lessons learned was the rep-and-warranty model did not serve us well during this crisis," he said. "We, too, are dealing with bad loans." Williams said Fannie is working to improve loan quality by creating standards and tools so when loans are delivered to the secondary market, the lender knows what they are selling and investor knows the risk of what they are buying. The Federal Housing Finance Agency, Fannie Mae and Freddie Mac also recently aligned servicing protocols to streamline the process for servicers and reach distressed borrowers earlier for a higher rate of success in getting them current again. Fannie continues to look inward to improve its risk management and internal controls, he said. "We are managing balance sheet very differently than we did in years past," he said. Williams declined to opine on how he thought housing finance should be reformed, only saying the market was extremely important to the nation and it should be "well regulated" to protect the integrity of the system. Write to Kerry Curry. Follow her on Twitter @communicatorKLC.