By Corbett B. Daly and David Lawder
WASHINGTON (Reuters) - The Obama administration nailed a 'condemned' sign on the wrecked U.S. housing finance system on Friday, but did not offer a clear blueprint for a rebuilding project that could go on for years.
With real estate markets fragile and 2012 elections ahead, political consensus on an overhaul that would raise mortgage costs was likely to be elusive, leaving mortgage giants Fannie Mae and Freddie Mac limping forward.
Both companies were seized by the government in 2008 amid heavy losses. They have sucked up $150 billion in taxpayer aid. As Wall Street has fled the market, the role of Fannie and Freddie has grown. They now back 85 percent of new mortgages.
The two companies -- known as government-sponsored enterprises, or GSEs -- would be wound down gradually and replaced by private capital, under three possible scenarios sketched out in the White House's set of proposals.
Treasury Secretary Timothy Geithner told CNBC as the plan was being released that mortgage costs will rise over the long run. He said the administration wants private capital to dominate mortgage finance.
"We can't wait too long. It's important Congress legislates some time over the next two years," Geithner added.
At the same time, the administration called for shorter term steps that would raise the cost of government-backed mortgages to make private-sector capital more attractive, while also reducing the huge loan portfolios of Fannie and Freddie.
The administration's strategy aims to "open a dialogue with Republicans that would lead to a consensus outcome within a couple of years," said Michael Barr, a University of Michigan professor and former Treasury Department official.
For that to happen, Senate Democrats will have to come to an agreement on any long-term solution with Republicans who took control of the House of Representatives in January.
Representative Jeb Hensarling, the No. 4 House Republican and a leading voice for the party on financial issues, wants to eliminate Fannie Mae and Freddie Mac within five years, allowing the private sector to take over the government role.
The GSEs' main job is to buy up mortgages that meet certain standards and then sell them on to investors as securities to free up cash for lenders to lend again.
Democrats are generally more supportive of a government role in the mortgage market and argue that removing the federal backstop for mortgages would make loans more expensive and price many middle class Americans out of homeownership.
"I want to make sure the window of opportunity for homeownership isn't closing for the next generation of homeowners," said John Taylor, chief of the National Community Reinvestment Coalition, an association of community groups that promote access to banking for working families.
The housing industry, including real estate agents, homebuilders and bankers support some government role for backstopping mortgages and have already started pushing back against some of the most aggressive privatization proposals.
Paul Ballew, chief economist at Nationwide Insurance, said, "Housing's at or near bottom, if we're going to make changes, now's the time."
(Reporting by Corbett B. Daly, David Lawder and Rachelle Younglai. Writing by Kevin Drawbaugh; Editing by Theodore d'Afflisio)
