US unveils housing market overhaul

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"The plan is for fundamental reform," said Treasury Secretary Tim Geithner, announcing a bid to phase out Fannie Mae and Freddie Mac -- two state-backed firms that have underpinned the housing market for 40 years.

More than two years after a US housing bubble sparked a global market meltdown, the proposal signaled the government's retreat from the $11 trillion market.

Geithner said the plan would also "strengthen consumer protection and preserve access to affordable housing for the people who need it." The proposals include a mandatory 10 percent down payment for US home buyers.

The wide-ranging proposals effectively end the US government's long-standing goal to help every American to own their own home.

"The administration believes that we must continue to help ensure that Americans have access to quality housing they can afford," the proposals said.

"This does not mean, however, that our goal is for all Americans to become homeowners."

While some proposals would have a direct and quick impact on home buyers, it is the reform of Fannie Mae and Freddie Mac that may have the broadest effect.

The two firms, which before the crisis back-stopped around three-quarters of the housing market, have come under fire for their role in the fueling the housing bubble.

In the wake of a long and painful recession the government has been left to guarantee directly or via deals with bank lenders more than nine out of every 10 new mortgages, the government said.

Geithner admitted that mortgage costs may rise without the cheap lending supplied only by firms that have the backing of the US government.

"Over the long run, the cost of a mortgage will rise modestly for the average American homeowner," Geithner told financial news channel CNBC.

Yet despite their roles in the financial meltdown, reforming Fannie and Freddie remains political charged.

Supporters argue the lenders have made housing affordable for millions of poorer Americans.

Critics say they represent unwarranted government to interference in the housing market.

The Obama administration called on Congress and stakeholders to have an "honest discussion" about the way forward.

In an effort to strike a deal between the center-left and its Republican advisories, the administration offered three options for Fannie and Freddie to be wound down, but stopped short of outright privatization or closure.

"The central question going forward is how to protect taxpayers without unduly increasing the cost of mortgages to American families," said senior Democratic congressman Barney Frank.

But experts warned the road ahead would be a long one, with many predicting no deal would be reached before the presidential elections in late 2012.

"There are no specific timelines for action in the paper, and regardless of the Treasury's recommendations, ultimately it will be up to Congress to enact fundamental housing finance reform," said Rajiv Setia and Nicholas Strand of Barclays Capital.

That may suit the administration, which has expressed concerns that the still-fragile housing market could buckle under the weight of sweeping reforms that are brought too quickly.