The Fed, in a paper sent to lawmakers on Wednesday, outlined an array of steps that could be taken to help the housing sector, including allowing Fannie and Freddie to provide cheaper mortgages to a broader pool of homeowners.

The two companies, the biggest sources of U.S. mortgage funding, were seized by the government in 2008 when they were on the brink of collapse. They have been propped up by $169 billion in taxpayer aid since then, making them a target of many on Capitol Hill.

Even the Obama administration, in a trio of alternatives laid out early last year to reform the U.S. mortgage finance system, supported reducing the government's role in housing finance.

"It comes at a time that Congress has become quite skeptical of Fannie and Freddie and their role, and seems to be looking for ways to diminish their long-run role in housing finance, not increase it," said David Resler, chief economic adviser at Nomura Securities International.

While legislative steps are likely off the table, the Fed's recommendations left plenty of scope for other approaches and could add to pressure on Fannie Mae's and Freddie Mac's regulator, the Federal Housing Finance Agency, to take a broad view in helping housing markets recover rather than focusing narrowly on stemming losses at the firms.

The Fed's proposal to expand Fannie and Freddie's role in the government's main refinance program was among a number of measures the U.S. central bank recommended aimed at bringing down the inventory of unsold homes, making it easier for borrowers to get credit and containing an onslaught of foreclosures.

"Continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery," the Fed said in the paper, which was sent to the chairman and ranking minority members of the Senate and House of Representatives banking committees.

The Fed also said a government-facilitated program to turn real estate that banks have taken over into rental properties might be beneficial.

The Obama administration has already signaled an intention to sell off properties Fannie Mae and Freddie Mac hold to investors who are willing to turn them into rental properties.

Fed Chairman Ben Bernanke, in a letter accompanying the recommendations, said the U.S. central bank was responding to requests for advice about what could be done to halt the spiral of falling home prices and rising foreclosures.

Among the recommendations: allow Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) to refinance loans that they have not guaranteed.

The United States, the world's largest economy, has yet to engineer a convincing recovery from the worst recession in decades, in part because of the depressed housing market that has experienced declines not seen since the Great Depression.

House prices have fallen 33 percent from their 2006 peak, resulting in an estimated $7 trillion in household wealth losses. Currently, about 12 million homeowners are underwater on their mortgages nationally, and in states experiencing the largest house price declines, roughly half of all mortgage borrowers owe more than their homes are worth.

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Fannie and Freddie, government-sponsored enterprises (GSE) that are chartered by Congress, buy loans from lenders and repackage them as securities for investors, which they then guarantee. The aim is to provide a steady source of funds for the mortgage market.

Many Republicans accuse the companies of having fostered the shoddy underwriting practices that led to the financial collapse. However, the firms had drawn scrutiny long before the crisis because lawmakers believed their implicit government backing gave them a competitive edge in the mortgage market.

The Fed estimates expanding their authority could allow an additional 1 million to 2.5 million borrowers to refinance loans into lower interest rates through the government's Home Affordable Refinance Program. So far, only about 925,000 mortgages have been refinanced through the program.

Although the GSEs would take on added credit risk by expanding HARP to non-GSE loans, the broader benefits might offset some of the costs, the Fed said.

However, the recommendations also pit the Fed against Fannie Mae and Freddie Mac's regulator in a debate over what is more important: stemming losses at the GSEs or the overarching goal of restoring health in housing markets.

"Some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery," the Fed's paper said.

Some of the Fed's proposals, including a shift in the way the firms handle mortgages that go into default, could be put in place with the consent of the regulator, without congressional action.

"It is particularly telling that the white paper calls for regulators to evaluate their options on a more macro level rather than simply base evaluations on short term gains or losses," Senate Banking Committee Chairman Tim Johnson said in a statement.

The Fed said one factor causing tighter credit is the tendency of Fannie Mae and Freddie Mac to return mortgages to lenders if they see any defects. While that has limited the GSEs' need to draw on Treasury aid, it has also discouraged lenders from originating new mortgages, the Fed said.

The mortgage market told a sad story throughout 2011: record low rates, but few people taking advantage of them to buy homes.

The likely scenario in the new year, according to many analysts, is more of the same. Although the Federal Reservehas pledged to keep rates low through 2013, the experts say high unemployment and home prices that are still falling in many areas provide little incentive for stressed-out consumers to surge back into the housing market.

"I think there may be a little bit of an uptick in units sold," said Doug Duncan, vice president and chief economist at mortgage finance giant Fannie Mae. "But home prices will probably be down again, so the total dollars spent on purchases is likely to be pretty close" to 2011.

Freddie Mac, the other big government-backed mortgage company, had predicted two years ago that lenders would write $1.8 trillion in home loans in 2011. They later revised that estimate to just over $1 trillion.

In the end, home lending last year totaled $1.3 trillion, down from $1.7 trillion in 2010 and an all-time high of nearly $3.3 trillion in 2005.

Last year's better-than-expected finish had nothing to do with home purchases. Instead, a decline in 30-year fixed mortgage rates to historic lows of less than 4% triggered a massive wave of refinancings.

As last year began, Freddie Mac expected applications for home-purchase loans to make up two-thirds of all mortgage demand by the end of 2011. As it turned out, about 4 in 5 mortgage applications in December were from homeowners wanting to refinance, according to the Mortgage Bankers Assn.

Little wonder why. Lenders were offering 30-year fixed-rate mortgages to solid borrowers at an average of 3.95% last week, the ninth consecutive week of rates at or below 4%, Freddie Mac said. (The survey covers loans up to $417,000 with borrowers paying less than 1% of the amount in upfront lender fees.)

That wrapped up a year of record lows. In 1981 and 1982, the average 30-year mortgage carried an interest rate of more than 16%, and the typical rate was above 8% as recently as 2000, Freddie Mac said. The average last year was 4.45%. Freddie Mac economists are predicting an average of 4.5% for 2012, increasing to 5.4% in 2013 — still phenomenally low by historic standards.

But in the long-suffering economy, "remarkably low rates are not enough," said Michael Fratantoni, an economist for the Mortgage Bankers Assn. He noted that many homeowners can't even take advantage of the opportunity to refinance because of "lack of equity in their properties, poor credit and a weak job market."

With lending standards still tight and demand for home loans waning, Morgan Stanley analysts titled their housing outlook for 2012 "The Year of the Landlord."

"While we had forecast lower prices [for 2011], we did hold out some hope that at the very least transactions would pick up slightly from 2010 levels," said the report from a team led by analyst Oliver Chang.

"However, it proved to be too optimistic a prediction," the report said. "Not only did total home sales fail to rise, but also mortgage applications for purchase continued to fall — indicating that not only is tight mortgage credit limiting demand, but even the desire to buy a home continued to wane."

Analysts aren't universally pessimistic: "Housing has hit the bottom and has begun to heal slowly," said Cal State Channel Islands professor Sung Won Sohn, a former top economics advisor to the White House and Wells Fargo & Co.

Although large numbers of foreclosures and other distressed home sales are keeping housing prices from rising, the inventory of new homes is at a 49-year low, setting the stage for a rebound, Sohn said in his 2011 housing forecast.

"On balance," he said, "the increased demand for rental housing, higher rents and multifamily starts should encourage home builders and boost confidence on the part of the potential home buyers. Despite the high level of foreclosures, house prices should stabilize and even rise slightly toward the end of 2012."

But any recovery will be slow given the extreme damage inflicted by the housing boom and bust, warned Duncan, the Fannie Mae economist.

"I tell people we're five years through a 10-year adjustment," he said. "Not until year 10 will we return to the traditional rate of housing starts."