Treasury Secretary Timothy Geithner said on Wednesday that fundamental reform of the government's role in the housing finance market is needed and it will be next year before proposals are ready for Congress.

He told a House of Representatives appropriations subcommittee that principles to guide reform of mortgage finance leaders Fannie Mae and Freddie Mac, as well as other government agencies, will be coming soon.

This is a very complicated issue, he said. It doesn't just involve Fannie and Freddie, we want to take a careful look at the entire set of government agencies that act in the housing market now and the set of policies that helped contribute to this terrible crisis.

The government took control of Fannie and Freddie, placing them in conservatorship, in 2008 at the peak of the financial crisis, and it remains unclear what lawmakers want to do with them as they try to reshape housing market finance. Fannie and Freddie have both existed as government-chartered, privately held companies.

There have been growing calls for changes to Fannie and Freddie and questions whether they should be returned to their prior quasi-government status.

Geithner said that after public comment is gathered, Treasury will likely be able to present specific proposals to Congress next year for reform and said it was just too busy to do so any earlier.

I'll just be honest with you, we're doing a lot of things, we just got a lot going on and...to do it right, we wanted to go through a process of more careful reflection, he said.

If we rush this, the risk is that we not achieve enough and not get consensus but my first look at it is we're going to need fundamental reform of the government's role in the housing market.

CUT FEES OR FACE PRESSURE

Geithner, who appeared at the hearing to testify on the Treasury Department's budget, also lashed out at big banks that he said exploited customers for years by charging over-sized fees. He said they have a duty to cut charges now and will be pressured to do so if they don't act voluntarily.

Geithner seized on an announcement by Bank of America Corp on Tuesday that it was cutting debit card overdraft fees to make the case that Congress needs to get a financial regulatory package passed soon.

After years when we saw financial companies competing to exploit vulnerable borrowers, it is good to see banks competing to benefit their consumers, Geithner told the subcommittee.

He urged other banks to similarly cut fees but said voluntary action wasn't enough and urged Senate lawmakers to pick up the pace to complete work on a financial regulatory overhaul as House lawmakers already have done.

Geithner said the Obama administration still supports an independent consumer protection agency, a proposal that does not seem to have strong traction with lawmakers, and urged speed by Congress to complete a financial reforms package.

Our country can ill afford another race to the bottom in market practices, Geithner said.

ECONOMY BETTER BUT NOT HEALED

Geithner claimed that administration efforts to boost the economy out of recession have been successful, but warned the economy still faced severe challenges.

There has been progress in reducing taxpayers' stake in the banking sector as a result of the bailout funds but said more progress is needed.

Treasury will continue its efforts in these areas until recovery is firmly established and the financial system is repaired and reformed, Geithner said.

He also was asked about possible U.S. backing for a call by visiting Greek President George Papandreou for a clampdown on the use of some derivatives products, especially if they are used to speculate against a country's sovereign debt.

Geithner and President Barack Obama met Papandreou on Tuesday and the Greek leader claimed afterward that he had received an encouraging response from Obama to his call.

It is very important that the United States work with Europe to put in place a comprehensive set of reforms to provide oversight over the derivatives markets, Geithner said. It is important to us, it is important to them, it's something you have to do globally if you're going to do it effectively.

The Obama administration and Congress still are trying to complete its own financial regulatory overhaul and have proposed putting more derivatives trading on exchanges where it can be regulated more effectively.

Geithner appeared before the subcommittee in support of Treasury's request for a $474 million increase in its departmental budget, excluding proposed expenditures for international programs such as the U.S. contribution to a new food security fund.

The $13.9 billion budget for the Treasury's 10 appropriated bureaus would represent a 3.5 percent increase over fiscal 2009, which ended September 30.

(Additional reporting by David Lawder, editing by Leslie Adler)

Barack obama Timothy geithner Freddie mac