Treasury Secretary Timothy Geithner on Tuesday launched what could be a years-long process of overhauling the government's role in helping Americans buy homes, a first step toward rebuilding the housing finance system at the heart of the financial crisis.

Geithner told lawmakers the government should continue to play some role in any new system of housing finance Congress develops, although he said mortgage finance giants Fannie Mae and Freddie Mac should not be nationalized.

The two firms, which own or guarantee more than half of all U.S. residential mortgages, were seized by the government in late 2008 as mortgage losses mounted. Fannie and Freddie, which were chartered by Congress to promote homeownership but operated as private, shareholder companies, have been central to the Obama administration's efforts to revive the battered housing market.

I think there is a quite strong economic case, quite a strong public policy case, for preserving, designing some form of guarantee for the government to help facilitate a stable housing finance market, Geithner told the House of Representatives Financial Services Committee.

Geithner said the central role the housing sector plays in the U.S. economy and its vulnerability to financial shocks justified a degree of government backing.

I think we will be likely to conclude, as our predecessors have, that there will be some role for a guarantee of some weight, he said.

Fannie Mae's and Freddie Mac's quasi-public status allowed them access to cheap capital, which helped boost their profits. They ran into trouble when home prices -- and the complicated securities tied to them -- began to tumble.

The government has so far injected more than $125 billion into the two companies and the support is expected to continue. Some analysts expect taxpayers to pump as much as $200 billion into the companies by the end of the year as losses continue.

The Obama administration has pledged unlimited support for Fannie Mae and Freddie Mac through 2012, no matter how high their losses go.

Geithner said a new system of housing finance needs to be found for the long term.

Many Republican lawmakers want to phase out Fannie Mae and Freddie Mac and replace them with a housing finance market where private capital is the primary source of funding.

The Obama administration has been reluctant to put forth a proposal on the future of the two firms. Representative Barney Frank, chairman of the House Financial Services Committee, called the hearing with Geithner to jump-start debate on the issue.

We have two jobs here today. One is to figure out the best way to wind down Fannie Mae and Freddie Mac. But an equally important job is to decide what goes in their place, the Massachusetts Democrat said. You can't really tear down the old jail until you've built the new one.

Geithner provided only a vague outline of how the administration wants to proceed. Last month, he said any specific proposal would not come until 2011 at the earliest.

Representative Spencer Bachus, the panel's top Republican, called the lack of action creating a new system unacceptable.

Without reform, the bailouts will not stop, the housing market will not find its footing and the American economy will not recover, Bachus told Geithner.

The Treasury chief said any effort to overhaul the housing finance system should ensure that mortgage credit is widely available and should promote affordable housing, consumer protection and financial stability.

Any new system aiming to achieve those goals should have a diversified investor base, accurate and transparent pricing, secondary market liquidity and clearly defined goals and objectives, he said.

I suspect we are going to find very strong support for reform, Geithner said. The challenge is going to be just to design something that we think is going to work better in the future.

(Editing by Kenneth Barry and Leslie Adler)

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