All year long, the Obama administration has defended its decision to postpone the debate over the fate of Fannie Mae and Freddie Mac by arguing that it first needed to put the housing market back on track.

Now, as mortgage-industry executives and government officials prepare to meet for a summit on Tuesday to begin those discussions in earnest, policy makers are facing an unexpected problem: The housing market appears to be stalling.

That will make officials more cautious in considering any dramatic overhaul, because a shaky outlook further underscores the market's heavy dependence on Fannie and Freddie, which together with the Federal Housing Administration are backstopping nine out of every 10 new loans.

"It pulls the debate in the opposite direction," said Howard Glaser, an industry consultant. "If we're stuck in the midst of this semi-permanent housing crisis, the question of the federal role becomes almost intractable."

Over the past year, housing prices across much of the country began to stabilize as the government spurred sales by providing federal tax credits for home buyers and by holding down mortgage rates. The removal of those supports has exposed lingering weakness, putting renewed pressure on prices.

While mortgage rates are still at record lows, home sales have plunged in the months following the expiration of home-buyer tax credits in April. In July, they dropped 27% in Denver, 42% in Minneapolis and 45% in Milwaukee from a year earlier, according to data from local real-estate brokers' groups.

Meanwhile, efforts to modify mortgages, which have held potential foreclosures off the market, have fallen short of their goals. In June, the number of homeowners whose government loan modifications were canceled, because they didn't make their payments or couldn't provide qualifying documents, was double the number of borrowers who entered the program. If more homes that represent a "shadow supply" of delinquent loans and foreclosures hit the market, home prices could tumble further.

"There's been a feeling in government, which seems to be more pervasive than it was six months ago, that says, 'We've solved this housing problem; let's move on to Fannie and Freddie,'" said Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York. "But you haven't solved this housing problem. We have another round of home prices going down a little more."

Still, Tuesday's sessions could help build broader support for the road map the White House has promised to deliver by early next year. They may also help shield the administration against accusations of foot-dragging as the two-year anniversary of the government takeover of Fannie and Freddie approaches.

Panelists include capital markets veterans Lewis Ranieri, the co-inventor of the mortgage-backed security, and Pacific Investment Management Co.'s Bill Gross; the heads of the mortgage banking divisions at Wells Fargo & Co. and Bank of America Corp.; and academics and economists.

Already, administration officials have said the previous ownership model for Fannie and Freddie should be discarded. For decades, a fuzzy "implied" guarantee allowed the companies, owned by private shareholders, to borrow cheaply because investors assumed that the government would rescue the firms at the first whiff of trouble.

At the same time, a consensus of academics, industry officials and investors has coalesced around the idea of using the government to provide explicit guarantees for securities backed by mortgages that meet certain standards. Treasury Secretary Timothy Geithner has said there is a strong case for "some type" of government guarantee that allows people to finance a home purchase even during a severe recession

Tough questions loom over how those guarantees would be structured and priced and what entities would provide them. One overarching goal is to restore the private sector to its historical role in taking credit risk for a larger share of the market. "We have to get back to some semblance of that world," an administration official said.

Some conservatives, including congressional Republicans, have come out against returning to any mortgage market that relies on government subsidies or guarantees. That could lead to higher costs, but they say it is the only way to prevent taxpayers from being on the hook again for massive losses.

While the administration has promised to deliver "fundamental change," officials are likely to proceed slowly--focusing as much attention on any transition as they do on the final destination--to avoid rattling the $5 trillion bond market for government-backed mortgages. "People who have big reform ideas and objectives and no way to get there, that's not realistic," the administration official said.

Policy makers appear less likely to push for wholesale changes such as any move away from supporting long-term, fixed-rate loans or from a secondary market built upon securitization, where loans are packaged and then sold to investors as bonds.

The federal government took over Fannie and Freddie in September 2008 through a legal process known as conservatorship and has since pledged to inject unlimited amounts of taxpayer money to keep the firms afloat. So far, it has committed $148 billion. That tab could grow if prices fall further.

By: Nick Timiraos