Oct. 26 (Bloomberg) -- The U.S. housing market faces a “difficult” return to normal because government-sponsored enterprises own or guarantee most mortgage lending while alternative sources have disappeared, said an economist with the Federal Reserve Bank of San Francisco.

“Fannie Mae, Freddie Mac, and Ginnie Mae now own or guarantee an overwhelming share of originations,” bank senior economist John Krainer wrote in a paper released today. “At the same time, non-agency mortgage securitization and loans retained in lender portfolios have largely dried up.”

The paper underscores the challenge that economists at the San Francisco Fed, one of 12 regional Fed banks, believe that the economy faces as it begins to emerge from the worst recession in seven decades. Bank researcher Glenn Rudebusch concluded in another paper this month that the economy is not likely to return to full employment soon even though the recession is “almost certainly” over.

The U.S. government seized control of Fannie Mae and Freddie Mac in September 2008, after a surge in mortgage defaults threatened to topple the companies. The Treasury Department has committed as much as $400 billion to keep the two enterprises afloat while President Barack Obama’s policy makers figure out how to restructure their operations.

“With the vast majority of current mortgage lending now intermediated in some form by the GSEs, it will be difficult for the housing market to return to normal,” Krainer wrote.

The San Francisco Fed is led by Janet Yellen, who told reporters in June that the possibility of leaving the benchmark U.S. interest rate near zero for years is “not outside the realm of possibility.”

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

Last Updated: October 26, 2009 13:15 EDT