The Obama administration’s proposal for reducing the government’s role in housing finance may pit Wall Street against real estate groups as it restructures the $11 trillion mortgage market.

The report released Friday by Treasury Secretary Timothy F. Geithner offers three options for attracting private capital back into housing finance while shrinking the role played by Fannie Mae and Freddie Mac, the government-sponsored enterprises that have been sustained by U.S. aid since September 2008. The debate over the options may create new sets of winners and losers, according to stakeholders on both sides of the issue.

Banking-industry groups praised the proposals for laying out steps that could increase their share of a market long dominated by the two GSEs. At the same time, community banks, real estate agents, builders and consumer groups that have benefited from the government support rallied to fight changes that would shift power to big banks.

“The basic thrust of it is that we’ve got to reduce the federal government’s role in the mortgage market,” said Bert Ely, a banking consultant based in Alexandria, Virginia. “The challenge is how far can you go in that direction, how fast can you go, and what should be the residual government role?”

Groups opposed to expanding the power of big banks said the report’s most extreme privatization options should be off the table. Another option, which would privatize the guarantee function of Fannie Mae and Freddie Mac, would only work depending on how it is written, they said.

Privatization Plan

Under the privatization plan, the government would regulate insurers and, in exchange for a premium, provide a backstop in the event of a market failure. The approach, which follows the contours of plans submitted by groups including the Financial Services Roundtable, could give big banks the opportunity to move into a niche that would be vacated by the GSEs.

“They’re saying let’s just move everything over to the private sector,” said Lawrence Yun, senior vice president of the National Association of Realtors, who joined others in the real estate industry in opposing the proposal.

The administration’s emphasis on expanding privatization, won praise from Tom Deutsch, executive director of the American Securitization Forum, who cited short-term proposals that would reduce the market share of Fannie Mae and Freddie Mac, which now own or insure almost 97 percent of mortgage bonds.

“We are encouraged by the plan’s objective of creating a level playing field through an increase in guarantee fees that removes Fannie’s and Freddie’s capital advantages,” Deutsch said. “This unfair advantage has restricted the ability of private capital to fully support our housing finance system and shifted that burden to the American taxpayer.”

Benefits and Risks

The report acknowledged the benefits and risks of privatization, saying it would provide the “lowest-cost access to mortgage credit” among the three options by attracting investors while creating the risk that it could “artificially inflate the value of housing assets.”

A private system also doesn’t necessarily protect taxpayers, the report said.

If oversight is lax or government premiums are underpriced, “private actors in the market may take on excessive risk and the taxpayer again could bear the cost,” the report said.

That concern is one shared by the real estate industry.

“The banking industry is so highly concentrated that it’s very vulnerable to tacit collusion, meaning consumers will be paying excess fees because of high concentration,” Yun said in an interview.

However lawmakers and the administration decide to proceed, banks, industry and consumer groups will have time to weigh in.

During a conference call with reporters Friday, Geithner estimated it would take “five to seven years” to transition to the new system of housing finance.

One of the most important things to do during the debate “is to make sure that this is a smooth, deliberate transition that doesn’t disrupt the functioning of the mortgage market,” Randy Snook, executive vice president of SIFMA, said in an interview.