) -- In an era where politicians use financial reform as a vehicle to get into the spotlight, it's odd that the

two entities

which have connections to $5.66 trillion worth of mostly residential mortgages aren't being talked about much at all.

Fannie Mae


Freddie Mac

appear to have been swept under the rug of financial reform -- perhaps because the task of restructuring them is so enormous and complex. Although the White House has promised to outline a plan for Fannie and Freddie within the next couple of weeks, in the federal budget proposal, Treasury Secretary Timothy Geithner recently acknowledged that the process probably won't begin in 2010.

"It's just a complicated thing to get right," he said in a

PBS interview

that aired last week.

Barney Frank (D., Mass.) sent shock waves through the bond markets the following day by saying the House Financial Services Committee, which he chairs, will probably recommend "abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system."

Although "abolish" is a scary word, it's unclear why it frightened mortgage-bond investors so much: That's pretty much the same vague notion politicians have been tossing around since Fannie and Freddie were put into conservatorship 16 months ago. Frank didn't provide any specifics about what they may look like going forward, and said changes -- whatever they may be -- won't be coming any time soon.

In an effort to find out what's going on behind the scenes, or what options the Beltway appears to favor, I reached out to half a dozen key financial legislators or legislative aides, as well as a lobbying group, and several industry players over the past month. The response was something like a box of crickets: Only a few responded to say they hadn't heard anything, and none wanted to go on record as saying so.

"No one, I mean NO one, knows what's going to happen," one Washington insider replied by e-mail.

Last June, the Obama administration outlined six potential options for reform, a few of which don't seem to stand any chance of success. (For instance, one source whose bond shop is very active in the mortgage space didn't even know what

covered bonds

were, much less how the government would replace the country's $5+ trillion worth of mortgage-backed securities with them.) An industry group has also issued a


that would keep Fannie and Freddie in the same public-private hybrid, but with some nuances.

Liberals tend to favor a plan that pushes affordable housing, and leaves much of the process of getting there in government hands. Yet the government can't afford to forever hold mortgage rates down and finance every homeowner who can't afford to buy. Conservatives tend to lean toward an entirely free-market approach, but there's little chance the government wants to -- or even can -- exit the mortgage market completely.

"We clearly have a mythology in this country about home ownership," says Jeff Lewis, chairman of Generation Mortgage, one of the country's biggest reverse-mortgage lenders. "But if you look around the world, these kinds of entities don't exist. We have to look at it and ask, is home ownership the goal or is affordability the goal?"

Indeed, a priority has been placed on government's presence in the mortgage market for more than 40 years, at least since Fannie and Freddie were chartered as government-sponsored entities. Taxpayers now own 80% of the firms, and the Obama administration has essentially given them a blank check to support the mortgage market. That doesn't include the Federal Reserve's purchase of $1.1 trillion in mortgage debt over the past year, whose unwind is riddled with uncertainty.

But Lewis notes that the mortgage market has adapted to changes remarkably since the crisis took hold in mid-2008. It was once frozen with fear that Fannie and Freddie would crumble under the weight of bad mortgage debt, and risk-averse traders sent spreads through the roof. Now?

"Lo and behold, a year and a quarter later, most of the loans we sell in our industry right now are Ginnie Mae pass-throughs," says Lewis, referring to another government entity that guarantees mortgages. "I would guess at one point 100% of what we sold was Fannie Mae. Now they account for a minority of what is produced."

He says Fannie and Freddie were once "crowding out" private buyers because of their huge presence in the mortgage space, but that the private firms can replace them as long as there is some semblance of government assurance. As Fannie and Freddie debt became less profitable because of explicit government support,

Ginnie Mae

issuance surged 68% to $454 billion last year.

Lewis says the market can survive without Fannie and Freddie remaining outright government agencies. But "the part of it that I don't think anybody thinks we can live without, at least for the foreseeable future, is the guarantees."

So what will happen to Fannie and Freddie? They probably won't remain government wards, but winding down the status quo will take quite a few years. They probably won't become entirely private, either, because America has a history of government-supported housing. Also, if taxpayers are left holding the bag on mammoth mortgage losses, and they're restructured into profitable, shareholder-owned entities, populist rage would reach a new octave.

The shape of their public-private model, however, is too politically delicate and too entwined with a fragile housing market to be decided in 2010, even if it's proposed next month.

"This is not imminent," says Lewis, "it is very complex. And given how packed the agenda is in Washington, I'd bet it's not going to happen any time soon, probably not this year."

Both stocks were looking slightly lower in early action on Thursday, and each is down more than 15% since the start of the year after a volatile 2009 based on closes of $1.01 for Fannie Mae and $1.21 for Freddie Mac in Wednesday's session.


Written by Lauren Tara LaCapra in New York