A Senate bill, introduced in June by Sens. Bob Corker (R., Tenn.) and Mark Warner (D., Va.) would replace Fannie and Freddie with federal reinsurance for mortgage-backed securities, much the way the Federal Deposit Insurance Corp. insures bank deposits. The goal is to restore private investors to the position of taking the first losses on mortgages but provide the guarantees that many believe are needed to preserve access -- especially during downturns -- to 30-year, fixed-rate loans.

President Barack Obama waded into the debate for the first time last month when he said that he supported the general aims of the Senate bill. The White House also is working behind the scenes with the Senate on a related proposal that could potentially use parts of a shuttered Fannie and Freddie to fashion new mortgage-guarantee entities, according to people familiar with the discussions.

Everyone is digging in for a protracted battle. At one end are home builders, real-estate agents, small lenders and consumer advocates who want to preserve the largest possible federal safety net. At the other end are free-market economists who believe housing receives too much government support. Loan guarantees, they say, put undue risk on taxpayers while diverting investment from other sectors of the economy.

Big banks generally fall somewhere in between. They have long viewed Fannie and Freddie as competitors, but they don't want to lose access to a government guarantee that keeps markets functioning smoothly. Banks have profited handsomely over the past two years by collecting fees for refinancing loans that can be sold to Fannie and Freddie.