WASHINGTON (

TheStreet

) -- The debate over housing-finance reform is expected to kick off in earnest next month, after the U.S. Treasury Department issues a white paper with suggestions for a future regulatory framework.

After that, expect it to get ugly - but don't expect much to get done legislatively between now and 2012, or much to change thereafter.

"You're going to see a real battle," says David E. Johnson, CEO of Strategic Vision, who consults with Republicans. "The odds of getting anything done are probably 50-50, if even that high. Republicans are terrified of antagonizing the Tea Party base - you're seeing that already with the tax debate - so I don't think that we'll see anything significant get done."

Johnson suspects that more traditional Republicans will hue toward phasing out government control gradually, as John McCain (R., Ariz.) and other leading GOP members

proposed last year.

More radical members of the right wing who were swept into the House last month will probably want "everything to stop right away - complete shut down, pull-out," says Johnson - an outcome that would never get past the Democratic-controlled Senate, much less the president's desk.

Meanwhile, Democrats will go along with the Obama administration's proposal "and watch the Republicans battle it out," he adds.

If nothing can get passed in 2011on housing-finance reform, it's even less likely to get passed during 2012 - an election year in which the Obama camp and legislators will all be focused on their re-election campaigns.

"As we read the tea leaves, we don't see the politics aligning in a way that causes great confidence in a congressional resolution to the Fannie-Freddie challenge in 2011," says Brian O'Reilly, president of D.C. consulting firm The Collingwood Group and a former executive at Fannie Mae. "And, unfortunately as you get closer to 2012, the likelihood of meaningful resolution goes down."

Housing finance is arguably the most important financial reform measure that will come out of the subprime crisis. The reason there's been little progress - or even debate - on the issue so far is that the housing market is far from healed. Any significant revisions to the way the market works right now could have dramatic effects on mortgage availability and cost at the consumer level, not to mention large banks like

JPMorgan Chase

(JPM) - Get Report

,

Bank of America

(BAC) - Get Report

,

Wells Fargo

(WFC) - Get Report

,

Citigroup

(C) - Get Report

,

U.S. Bancorp

(USB) - Get Report

,

Goldman Sachs

(GS) - Get Report

and

Morgan Stanley

(MS) - Get Report

that are so deeply involved in the housing and mortgage-securitization markets.

Those still wondering why the topic wasn't addressed in the Dodd-Frank financial reform bill can consider the following: A note

scribbled on the margin of a piece of paper regarding

Fannie Mae

(FMCC.OB)

and

Freddie Mac

(FMCC.OB)

sent bank stocks down in double-digit percentages in a single afternoon. Inflation hawks have sent bond yields, including mortgage rates, up tremendously in recent weeks, thanks to bullish signs on consumer spending and the

Federal Reserve

's loose monetary policy.

In other words, the markets are still in a tenuous position. Though foreclosures have hit a temporary hiccup, there's still plenty of soured mortgage debt in the pipeline. The U.S. housing market isn't expected to begin improving in any meaningful way until 2012. If extensive federal support hasn't been able to induce such a recovery, and a scribble could send the market into a tizzy, meaningful changes to the system could further hinder the recovery.

"I don't think homeowners would be too happy about it let alone builders or real estate brokers," says Dwight Smith, a partner at Alston & Bird in Washington who advises banks and thrifts.

Smith suspects the debate will be characterized by a lot of rhetoric, little of which will be followed by legislative action. The ultimate reform may deliver some tweaks, he says - such as adjustments to conforming-loan limits or higher costs for federal guarantees - but not a real overhaul of the current system.

"The outcome is a little bit difficult to predict," says Smith, "although at the end of the day I still think there will be a significant federal presence, largely in the form that Fannie and Freddie now take."

Looking ahead to 2011, there's likely to be a strong debate about Fannie, Freddie and the rest of the government-supported housing-finance enterprises. Republicans will push for free-market solutions; Democrats will push for extensive federal involvement. Industry groups will tout their own ideas and lobbyists will be on the Hill in force, a la Dodd-Frank.

O'Reilly is a strong advocate of the financial industry getting out in front of the issue and voicing their opinions loudly. He characterizes the debate as an important first step in forging a solution that can improve the regulatory structure without crippling the market.

"If I had to tell you one of the top three questions we are most asked by our clients at Collingwood Group, the last month in particular," he says, "it's, 'What's going to happen to Fannie and Freddie?', 'What's going to happen to Fannie and Freddie?' and 'What's going to happen to Freddie and Fannie?'"

The two firms have so far cost taxpayers $148 billion. Their regulator, the Federal Housing Finance Agency, says that number could to rise to $363 billion through 2013, in a worst-case economic scenario. The numbers are startlingly large in a year where the government has exited Citigroup with a profit of $12 billion and outlined plans to earn money on

AIG's

(AIG) - Get Report

$180 billion bailout.

Smith says that if housing-finance reform takes long enough, taxpayers could, in theory earn money on the Fannie-Freddie bailout as well.

"If nothing happens legislatively, they remain in conservatorship for awhile," he says. "As the economy improves, their situations will improve. And as the vast majority of banks have repaid their TARP money, Fannie and Freddie would do the same thing. They're just on a different time frame than banks in the economic recovery."

As far as 2011 goes, perhaps the most significant action will be what was included in Fannie and Freddie's conservatorship plan in 2008: The two firms are

required to wind down their retained mortgage portfolios by 10% a year, starting this year. Maybe they'll even be removed from the

pink sheets where the two firms' common stock has hovered under $1 since early May, down more than 95% since the federal government explicitly took control.

READ MORE ON FANNIE AND FREDDIE:

Why GOP's Fannie-Freddie Proposal Is Doomed

Treasury Getting Off Its Fannie

Wall Street Whispers: A GSE by Any Other Name

Wall Street Whispers: Will Obama Slay the Fannie and Freddie Beast?

News Flash: Fannie, Freddie Kaput

Wall Street Whispers: Fannie, Freddie Are Liquidating (Kind Of)

Wall Street Whispers: Pink-Sheet Politics

Fannie and Freddie: Making Bank Bailouts Look Cheap

Fannie, Freddie Fates Still Up in the Air: One Year Later

No New Plan in Sight for Fannie, Freddie

-- Written by Lauren Tara LaCapra in New York

.

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