Faced with a lose-lose proposition, Congress put off its decision on the fate of mortgage finance companies Fannie Mae and Freddie Mac, perhaps hoping the housing market recovers before losses get too big.

The financial regulatory overhaul, approved by Congress on Thursday, steered clear of reorganizing the government sponsored enterprises -- companies at the center of a U.S. housing crisis that drove the world into recession.

Both political parties agree a hybrid system that lets shareholders profit in the good times while taxpayers pay in the bad is unsustainable. But neither has come up with a workable plan to do that without inflicting more harm on the still-suffering housing market and the broader economy.

Given the bruising fight that took place over new rules for Wall Street in the wake of the worst financial crisis since the Great Depression, wholesale changes to the U.S. housing finance system could be too much for Congress to handle.

Edward Pinto, a former top official at Fannie Mae who now works as a consultant to private sector mortgage lenders, notes that each passing day makes it harder to change the system.

The longer this goes on the less likely they are going to be able to undo Fannie and Freddie and we are going to get stuck with them in some sort of zombie-like structure, Pinto said.

The Obama administration now says it will lay out a vision for Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) in the new year. But the new year also brings what is virtually certain to be at least a smaller majority for the ruling Democrats.

And White House Press Secretary Robert Gibbs acknowledged on Sunday what many political observers have said for months: it is possible Republicans could gain control of the U.S. House of Representatives in the November mid-term elections.

Either scenario would make substantial changes to Fannie Mae and Freddie Mac more difficult as many Republicans want to abolish them and many Democrats want to ensure there is some mechanism to promote affordable housing.

Two possible paths are filled with pitfalls.

Fully nationalize them and it puts the burden of what could be hundreds of billions of dollars in losses on the backs of taxpayers. Privatize them and the flow of home loans could dry up, tanking the real estate market.


Combined, Fannie Mae and Freddie Mac, which buy mortgages and free up lenders to lend again, have taken more than $145 billion from taxpayers since then-Treasury Secretary Henry Paulson seized them in 2008 as mortgage losses ballooned.

These days, the U.S. regulator charged with overseeing the companies is primarily concerned with boosting their financial health to limit the additional billions of dollars taxpayers are expected to have to shell out.

But policymakers need to focus on the threat staring them in the face: another housing downturn that would devastate an already fragile U.S. economy, said Brian Chappelle, a housing consultant at Potomac Partners in Washington.

Paulson's conservatorship for the GSEs was meant to be a temporary solution to buy time to figure out what to do with the two entities, which own or guarantee more than half of the total $11 trillion of outstanding U.S. residential mortgages.

Treasury Secretary Timothy Geithner last week acknowledged the housing market is still very hard, very tough out there. And there is a lot of challenge still ahead.

And that's why the fight over the future of Fannie Mae and Freddie Mac is likely to be protracted and changes are likely to come only around the margins.

The Mortgage Bankers Association on Wednesday said demand for new loans to purchase homes sunk to a 13-year low last week as buyers remained sidelined despite near-record low mortgage rates.

The government is now directly or indirectly backing 97 percent of newly issued mortgages, including loans backed by the Federal Housing Administration, which has 30 percent market share. That's up from just a few percent during the housing boom years. Some analysts see the market share of the FHA, which insures loans, climbing to as high as half of all new mortgages.

Uncle Sam is likely to be the lender of choice for the foreseeable future, said Howard Glaser, a consultant to mortgage lenders and former housing official in the Clinton administration. It's very hard to see what a normal market looks like anymore.

(Editing by Andrew Hay)