J. Craig Venter, the entrepreneur whose company recently signed a $300 million deal with Exxon Mobil to develop renewable energy sources, uses solar energy to warm the water of his new home and heat his pool. He's installed energy-efficient custom LED lights and drives a solar-powered Tesla.

A Scientist's Playhouse

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Ethan Pines for The Wall Street Journal

The exterior of Mr. Venter's home.

He also owns a gas-guzzling Range Rover and an Aston Martin. "I try to drive the two motorcycles and the Tesla more often to balance out the others," Dr. Venter said with a twinge of guilt, surveying the cars, motorcycles, surfboards, kayaks and other items parked in what he called his "toys and joys room." When he isn't working, Dr. Venter and his wife Heather Kowalski ride their motorcycles into the Borego desert or take their 45-foot-long jet boat out for a spin. (Ms. Kowalski said her 63-year-old husband likes to do "large donuts.")

Hailed by some as a genius and scorned by others as a showman, Dr. Venter remains as ambitious as ever. "We're trying to solve the energy crisis and create life," he said, describing the effort by his research institute and company to create a life form that could be used to produce alternative fuels, among other things. But the biologist, who is known for his work decoding the human genome, is beginning to embrace a somewhat mellower life style, and now leaves his townhome in Alexandria, Va., to spend nearly half the year in a 5,000-square-foot cream-colored contemporary glass-and-stucco home sitting on a craggy hillside overlooking the Pacific.

"This is longest that I've been in one place in 30 years," he said. "I'm saying 'no' to more and more events because it's so nice here."

Craig Venter on his deck.

The outer walls of the L-shaped house are mostly glass, maximizing views. Inside, the décor is midcentury modern with a heavy emphasis on wood: tables, sculptures, tree-stump stools. Scattered around are a handful of large wooden model ships as well as Dr. Venter's art collection, much of it assembled during travels aboard the Sorcerer, his 95-foot-long sloop and research vessel that trolls the seas collecting marine genetic samples.

Near the front door are a pair of weathered 6-foot-tall Burmese tombstones from the 1800s that resemble teak totem poles. Hanging in another room is an elaborately carved wooden plank from Ghana that was once the door to a medicine man's hut. And from Fiji, a 5½-foot-tall warrior wears an intense, penetrating stare. "He frightens a lot of people," said Ms. Kowalski, Dr. Venter's wife and publicist.

For Dr. Venter, moving to California is something of a homecoming. Originally from the San Francisco Bay Area, he moved at 17 to Newport Beach to chase waves and girls. Drafted to serve in Vietnam, Dr. Venter's experiences as a Navy medic spurred him to his biology career. As a scientist for the National Institutes of Health, he pioneered a technical shortcut that helped speed up the search for genes. He broke off to start his research institute and Celera Genomics. In 2000, the firm and U.S. government scientists announced a tie in the race to decode the human genome.

But the victory was tainted by what many scientists viewed as egoism—much of the genome Dr. Venter sequenced was his own, rather than a mix of genes from anonymous donors. Fired by the company in 2002, Dr. Venter has since founded a nonprofit research institute in Rockville, Md., and Synthetic Genomics, both with offices here.

The open atrium

When he bought the La Jolla property three years ago for $6 million, Dr. Venter says the house looked every bit its 1985 provenance. "It had shag carpeting and a terrarium that was leaking and overgrown," Dr. Venter said, adding that he liked the area's privacy and views. He spent 18 months and $3 million gut-renovating the three-story house, adding glass and converting an office into a screening room. He built a gym and sauna and a 900-square-foot front deck, where he and his wife were married a year and a half ago. Lower down on the hill, a 5,900-square-foot single-story home nearby with similar coastal views is on the market for $5.9 million.

On a recent Monday, Dr. Venter turned his living room into an office meeting space, as he often does when he's in town. Two assistants tapped away on BlackBerry devices and laptops as they discussed his calendar. An hour later, a trio of scientists from his research institute walked in to discuss the budget for a new project. "Pick a stump," Dr. Venter called out.

The group admired the latest addition to the Venter family: a rust-colored miniature poodle puppy named Darwin. "Have you sequenced his genome yet, Craig?" asked Ken Nealson, a microbiologist. "What are you waiting for? He's evolving."

"Craig is more relaxed here. It's a more efficient place for him. He can have his meetings down here and then run upstairs for a conference call. It really works," Ms. Kowalski said.

The federal government's mortgage-insurance agency is understating how much risk it has taken on, says a group of economists from the New York Federal Reserve and New York University, increasing the likelihood the agency may need taxpayer funds.

The economists warn that the Federal Housing Administration—which has jumped to fill the void left by the collapse of the private mortgage market—is overlooking factors that signal higher losses, according to a working paper released Thursday.

The agency has traditionally turned a profit for the U.S. government. But the economists warn that by underestimating the risks it faces, the FHA has increased the likelihood that it will have to ask Congress for money for the first time in its 75-year history.

The study doesn't say how likely that now is, but "it's hard to imagine that they won't be returning to Congress several times," said Andrew Caplin, one of the authors and an economics professor at NYU. "It's just inconceivable that the loans ... will not cause very large losses."

The FHA says it would need taxpayer money only in a worst-case housing-market scenario.

The economists conclude in their study that the share of borrowers who owe more than their homes are worth may be much higher than the agency forecasts.

The economists estimate that about 40% of mortgages insured by the FHA are worth more than the homes that secure them; as many as 14% of the loans may be for more than 115% of the home's value. The home-price measure used by the FHA puts the latter figure at 6%.

Such underwater borrowers are generally more likely to default if they lose their jobs or have trouble meeting mortgage payments, because they can't easily sell their house.

The FHA, in its annual review, doesn't give an estimate of the share of loans it backs that are underwater, although it does warn that such loans will greatly boost losses.

The economists' study also says the FHA should better account for a higher risk of default among borrowers in areas with high unemployment rates.

"You look at the areas in which they're underwater, you look at the unemployment rate in [those] places, you look at how little was invested upfront, and you know that a lot of these mortgages aren't coming back," Mr. Caplin said.

The FHA's share of the U.S. mortgage market has swelled. The FHA, which doesn't make loans but insures lenders against losses, backs about 25% of all home loans, up from less than 2% three years ago.

Loans backed by the agency are one of the few remaining ways home buyers can make low down payments. The FHA requires a minimum 3.5% down payment, while most private lenders require at least 10%.

FHA officials disagreed with many of the study's conclusions. "It's overstating the flaws," said a senior official who had seen early copies of the report.

The FHA concedes that it faces sharply rising losses as loan defaults mount, and that this is depleting its reserves.

Each year, the agency is required by law to conduct an independent review to estimate the value of its reserves after subtracting 30 years of projected losses. In its latest review last fall, the FHA said its reserves exceed projected losses by $3.6 billion, or about 0.5% of the $685 billion in loans outstanding, down from 3% one year earlier.

The economists' study argues that the agency's situation could be even worse.

The authors say the FHA's review doesn't accurately measure the share of its borrowers who may be underwater because it hasn't properly accounted for a jump in certain refinancing transactions. Those transactions, called streamline refinances, allow FHA borrowers current on their loans to refinance even if the value of the loan equals or exceeds the value of the home.

Streamline refinances, which became popular over the past year as home values plunged, accounted for about 21% of all FHA-backed loans last year, up from 6% the previous year.

The study concludes that at least 33% of borrowers who had a streamline refinance last year were underwater when they refinanced their loans, compared with an estimate of just 1.5% using the FHA's methodology.

"This is one of the world's riskier loans," Mr. Caplin said of extending a loan without knowing how much the collateral backing that loan is worth. "There's no way on earth they would have given you this loan as a new loan today."

Many streamline refinances have helped borrowers who otherwise wouldn't be able to qualify for a refinancing to take advantage of low mortgage rates. The FHA last year tightened rules governing streamline refinances, making them more expensive for borrowers who may be underwater.

FHA officials said the models used by the agency's independent actuary were no different from those used by private financial institutions.

There is "some risk that the FHA portfolio will perform worse than the actuary has predicted because there is uncertainty in any such forecast," said FHA Commissioner David Stevens. "But we stand by the actuarial review's findings as a reasonable assessment of our portfolio today."

The independent actuary that conducts the annual review, Integrated Financial Engineering of Rockville, Md., said its models adequately reflected the risk of streamline refinances and of rising unemployment.

"We did explore different model approaches. The results were virtually identical to what we found," said Tyler Yang, the firm's chief executive.

At the end of 2009, foreclosures were definitely "in the news." And for good reason. The number of foreclosures rose from 1.8 million at the end of 2008 to about 2.5 million at the end of 2009. According to RealtyTrac, at the end of 2009, there was a total of 2,824,674 properties involved in foreclosure filings; that total includes default notices, scheduled foreclosure auctions and bank repossessions. This means that 2.21 percent of all U.S. housing units - one in 45 - received at least one foreclosure filing during 2009. That is up from 1.84 percent in 2008, 1.03 percent in 2007 and 0.58 percent in 2006.

It is important, however, not to generalize foreclosure trends across all states. In fact, four states - Nevada, Arizona, Florida, and California - account for 45 percent of the foreclosure inventory (according to the Mortgage Bankers Association's Mortgage Delinquency Survey) and 50 percent of all delinquency filings (based on data from RealtyTrac). Nevada tops the list with more than 10 percent of its housing units receiving at least one delinquency notice. In general, throughout 2009 these four states topped the list with the highest rates of filings and the number of foreclosures.*

In contrast, Vermont boasted the lowest foreclosure rate - 0.05 percent of its housing units - as well as the lowest absolute number of foreclosures - 143. Similarly, North Dakota had only 0.13 percent of its housing units receiving a delinquency notice. West Virginia was third at 0.17 percent and South Dakota ranked fourth at 0.21 percent. For comparison, the average national delinquency rate in the same quarter was at 8.85 percent.

Current Situation

At the beginning of the foreclosure crisis, mortgage defaults were primarily among non-prime borrowers. But things changed. In 2009, the wave of foreclosures were largely among prime loans. This suggests that while the initial crisis stemmed from bad underwriting practices, the extension of the crisis was due to the national economic recession and borrowers losing their jobs. Actually, the number of seriously delinquent prime loans grew at a much faster rate in 2009 - 66 percent - than did the number of seriously delinquent subprime loans, which increased by about 20 percent. As a result, prime loan defaults accounted for about 60 percent of the increase in all delinquent loans over the past year.

Similarly, the number of prime loans in foreclosure has doubled in each of the past two years, 99 percent between 2007 and 2008, and 95 percent in 2009. In comparison, the number of subprime loans in the process of foreclosure increased only 5 percent in the past year and 12 percent the year before. There has been, however, a much lower share of subprime loans originated in the last year, falling by 14 percent from the year prior. In the 3rd quarter of 2009, prime mortgage foreclosures accounted for 54 percent of all foreclosures, while subprime loans accounted for 36 percent.

In the last couple of months, it has become evident that the foreclosure crisis has moved "up market." Among recent prime loan defaults, those loans with balances of between $417,000 and $600,000 have performed the worst. In fact, the monthly Mortgage Monitor by Lender Processing Services (LPS) suggests that non-agency jumbo prime loans have had the worst deterioration rates year-over-year for both delinquencies and foreclosures, with delinquencies increasing some 85 percent and foreclosures increasing some 190 percent, both significantly higher than other product types. In 2006, homes in the bottom one-third of home values accounted for almost 55 percent of all foreclosures. In 2009, the bottom one-third made up 35 percent of foreclosures, compared to 35 percent and 30 percent for the middle and top one-thirds, respectively. That means 30 percent of foreclosures are homes in the top tier of local home values, almost twice the proportion of foreclosures than three years ago. Data by Amherst Securities suggest that the increasing rate of negative equity among top home price tiers might be kindling this trend.

Underwater

Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of the second quarter of 2009. An additional 2.3 million mortgages were possibly approaching negative equity - or having less than five percent in equity. That adds up to nearly 28 percent of all residential properties with a mortgage nationwide.

The share of homeowners "under water" is still largely concentrated in five states - in fact, those states with the highest foreclosure rates, namely Nevada, Arizona, Florida, Michigan, and California. Among the top five states, the average negative equity share was 46 percent, compared to 13 percent for the remaining states.

In terms of larger metropolitan areas (with population greater than 50,000 people), the highest levels of negative equity are in those metros located in the top five "negative equity" states. Within smaller metropolitan areas largest losses are seen in Merced, CA and El Centro, CA (both 85 percent underwater), Modesto, CA and Stockton, CA (both 84 percent), Bakersfield, CA (79 percent), and Port St. Lucie, FL (79 percent).

"Strategic Defaults"

With estimates from LPS of some 25 percent of borrowers currently having negative equity nationwide, the question increasingly being asked is what the likelihood may be of homeowners underwater who are likely to "leave the pool", or "strategically default". According to a study by Experian and Oliver Wyman, more than a quarter of all existing defaults were found to be strategic and they more than doubled from 2007 to 2008 to 588,000. The study also found that borrowers with higher credit scores were 50 percent more likely to strategically default than those with lower credit scores.

In another survey study by Guiso, Sapienza, and Zingales**, the authors found that 26 percent of existing defaults were strategic. They also found that no household would default if the equity shortfall is less than 10 percent of the value of the home. Yet, 17 percent of households would default, even if they could afford to pay the mortgage, when the equity shortfall reaches 50 percent of the value
of their house.

Besides relocation costs, the most important variables in predicting strategic default are moral and social considerations. All things being equal, people who consider it immoral to default are 77 percent less likely to declare their intention to do so, while people who know someone who defaulted are 82 percent more likely to declare their intention to do so. That said, there is some research that suggests that while borrowers with negative equity should be walking away in droves, most homeowners choose not to strategically default due to the desire to avoid the shame and guilt of foreclosure and exaggerated anxiety over the perceived consequences from foreclosure.

What May Lie Ahead

What many analysts are finding alarming is the decreasing rate of delinquencies that are ending up in foreclosures. Loss mitigation efforts such as the Making Home Affordable Program (HAMP), as well as backlogs caused by the elevated delinquent loan volumes, are extending the number of days in delinquency. The data by LPS suggest that average number of delinquent days for loans in foreclosure has risen from 249 to 406 from January 2008 to December 2009 - an increase of 63 percent. The fear is that the increasing pool of troubled loans, also referred to as the "shadow inventory," is only going to lead to more inventory and home price problems in the future. (We'll discuss shadow inventory in a follow-up article in next month's Real Estate Insights.)

The impact of HAMP is still difficult to evaluate. December's numbers suggest 1,164,507 cumulative trial-period plan offers extended to borrowers, and 902,620 trial modifications started. The goal is 3-4 million homeowners with lower mortgage payments through a modification through 2012. Available data indicate around 112,000 modifications have turned permanent. The latest assessment of the program's progress by the State Foreclosure Prevention Working Group*** also suggests that while the HAMP has helped to slow down the foreclosure crisis, current efforts have been insufficient as the total number of struggling homeowners not on track for any foreclosure prevention assistance continues to grow. Indeed, the Working Group found that only four out of ten seriously delinquent borrowers were involved in loss mitigation efforts.

As the increase in the rates of prime loan defaults suggests, so does the predominant hardship reason for permanent modifications under the Making Home Affordable program: curtailment of income is currently the primary reason for mortgage defaulting. With the unemployment rate at or near 10 percent nationally, and millions of more Americans having either exited the workforce or remaining underemployed, it is very difficult to say definitively how the economy will play out in the next couple of years and what the effects will be on the future foreclosure rates.

The short-sales process, often agonizingly long, may not speed up overnight, but there’s reason to believe that better days are ahead. The federal government’s long-awaited guidelines for standardizing short sales were released at the end of 2009, and although they don’t take effect until April, mortgage servicers have the option of implementing them early.

The short sales guidelines are part of the government’s new Home Affordable Foreclosure Alternative Program, known as HAFA, which is an add-on to the Obama Administration’s more wide-reaching Home Affordable Modification Program launched in early 2009. The idea is that if borrowers are eligible for the modification program but are unable to work out a plan to stay in their home, they—and their lenders—have a well-mapped route for executing a short sale or a deed in lieu of foreclosure.

The new HAFA program applies to the large volume of so-called "risky" loans that were issued outside of Fannie Mae and Freddie Mac guidelines during the housing boom, such as zero-down loans, option ARMs, and Alt-A mortgages that didn’t require extensive income documentation (see sidebar, "Which Loans Are Eligible?"). As of this writing, Fannie and Freddie were developing their own, similar guidance for loans they’ve backed.

The HAFA guidelines are voluntary, but major banks and servicers—including Bank of America, Chase, Wells Fargo, and Citimortgage—as well as dozens of smaller lenders, are expected to participate, clearing up the logjam of potential short sales on their books.

To participate, a mortgage servicer must have opted in to the government’s Home Affordable Modification Program by the close of last year. Through the end of November 2009, there were 78 such mortgage servicers, which together cover approximately 85 percent of eligible mortgage debt, according to the program’s servicer performance report. 

How the Rules Will Help

Observers say the HAFA guidelines speak to many of the real estate industry’s ongoing frustrations over short sales. For starters, lenders will have a financial incentive to get these deals moving. Servicers get $1,000 to cover their costs, and subordinate lien holders get up to $3,000 through a matching arrangement in exchange for relinquishing their lien. In addition, borrowers receive $1,500 to defray their moving costs.

The guidelines also include standardized forms, procedures, and timelines—and allow the borrower to receive preapproved short sale terms prior to the property listing. These measures should address the resistance of serious buyers to invest time, money, and effort into a purchase offer without having any assurance that the lender will accept their offer or even look at it in a reasonable time frame (or, just as bad, accept a last-minute rival offer).

 Also, the HAFA rules require that borrowers be fully released from future liability for the debt. That will be a relief to home owners in recourse states who would otherwise remain liable for debt collection. Slightly fewer than half of the states are recourse states.

Getting New Systems In Place

Bank of America in late 2009 rolled out an initiative to dovetail with the guidelines, and other lenders may follow with their own programs that anticipate the new rules. Through its "cooperative program," the bank’s mortgage servicers reach out to owners who are unable to modify their mortgage. "We developed our program in anticipation of the federal guidelines," says David Sunlin, Bank of America Home Loans senior vice president who oversees the company’s foreclosure and REO activities. Sunlin participated in a webinar hosted by REALTOR® Magazine in mid-December to talk about the bank’s new procedures.

Sunlin says the bank’s program gives troubled owners "a preapproved solicitation for a short sale" along with proactive processing of all the required steps: "appraisals, review of financials, investor approvals, mortgage insurer approvals, second-lien approvals—all of these can be done while the property is being marketed," he says, "so when an offer is brought to the table we can do a much quicker turnaround."

It will take months for lenders to modify their procedures in accordance with the guidelines (and, for agency loans, in accordance with the Fannie Mae and Freddie Mac guidelines), and even then, the new rules surely won’t be a cure-all. But there does seem to be a light at the end of the tunnel. 

Sunlin says the fall-out rate for short sales at Bank of America has been as high as 70 percent. His hope is that with the new guidelines, that rate will drop to something similar to that for REO transactions, which have a 10 percent to 15 percent fall-out rate.

"Short sales have always been a reactive process," he says. "We need a proactive process, and the guidelines are a good start." REALTORS® no doubt would like to see that hold true.

Which Loans Are Eligible?

The Home Affordable Foreclosure Alternative Program provides short sales guidelines for loans not owned or guaranteed by Fannie Mae or Freddie Mac (those agencies are expected to release their own, similar guidance). The following conditions also must be met:

• The property is the borrower’s principal residence.
• The mortgage loan is a first lien mortgage originated on or before Jan. 1, 2009.
• The mortgage is delinquent or default is reasonably foreseeable.
• The current unpaid principal balance is equal to or less than $729,750.
• The borrower’s total monthly mortgage payment exceeds 31 percent of the borrower’s gross income.

That's the situation faced by Robert Fidler, a farmer who lost a High Court bid Wednesday to protect the once-secret castle he built 40 miles (65 kilometers) south of London and kept hidden from planning authorities.

The adverse decision means Fidler's roof must come down. He has one year to comply unless an appeal is successful.

To keep prying eyes from noticing his unauthorized abode, Fidler placed bales of hay and tarpaulin around his dream home in Salfords, Surrey, authorities said. The court ruled he could not benefit from his deception.

Mike Miller, a chief planner with the Reigate and Banstead Borough Council, said the council was delighted with the decision, which it viewed as a vindication of the decision to challenge Fidler in court.

"This was a blatant attempt at deception to circumvent the planning process," he said, adding that Fidler now has one year to destroy the castle, remove the ruins and return the property to its original state.

The unusual castle, complete with cannon, ramparts and stained glass, was completed in 2002 and Fidler lived there with family for more than four years before the authorities started legal action against him.

Fidler, who has had disagreements with planning authorities before, anticipated that his request for permission to build the castle would be denied, so he tried to take advantage of a rule that allows a structure to be legalized if it has been lived in for four years.

Fidler's lawyer, Pritpal Singh Swarn, said the decision will go to the Court of Appeal because it raised important planning issues. A further appeal to European courts is possible if British courts again reject Fidler's bid to legitimize his castle.

He said Fidler was extremely disappointed with the ruling and no local residents had complained about the castle.

"It has been pursued at the expense of the taxpayer which we find deeply regrettable — but Mr. Fidler will continue to fight for the right to live in his home," the lawyer said.

Authorities said he incorporated two grain silos into the design, covering them with material to give them a castellated appearance.

"Mr. Fidler made it quite clear that the construction of his house was undertaken in a clandestine fashion," the court ruled.

The percentage of Americans who owned their homes fell at the end of 2009 to the lowest point in nearly a decade, a reflection of continuing troubles in the housing market even as the sector showed signs of stabilizing.

In one upbeat sign, an index of pending sales of previously owned homes increased 1.0% to 96.6 in December, the National Association of Realtors said Tuesday, suggesting the housing market is steadying after sharp swings caused by the uncertain fate of a government tax credit.

Yet home ownership is sliding. Some 67.3% of Americans owned their homes in the fourth quarter of last year, based on seasonally adjusted data, the Commerce Department said Tuesday. That is the lowest percentage since the second quarter of 2000, when the same share of Americans owned homes.

"The home-ownership data I think really just underscores how this country as a whole became obsessed with getting people into homes," said Mike Larson, real-estate and interest-rate analyst at Weiss Research Inc., an investment-research firm. "You can do all kinds of things to get people into a house, which we did; the real problem is making it so they can stay there."

The home-ownership rate reached a high of 69% in 2004 as low interest rates and easy credit prompted large numbers of families to stop renting and purchase homes. But the rate began to fall two years later as some homeowners struggled to make their mortgage payments and eventually lost their homes to foreclosure. Between 2007 to 2009, nearly four million homes were lost to foreclosure. And home ownership rates are now moving closer to the level that was common in the 1990s.

Still, some economists had expected the home-ownership rate to stabilize or even rise slightly in the fourth quarter, because of the Obama administration's tax credit for first-time home buyers. The tax credit fueled a home-sales jump in September, October and November. But economists now believe that the number of foreclosures during the quarter overwhelmed rising home sales. "Had it not been for the tax credit, the home-ownership rate would have fallen even further," said Thomas Lawler, an independent housing economist.

The decline in home ownership reached all regions of the U.S. but was most pronounced in the South, where the level fell to 69.1% from 69.8% a year ago.

Meanwhile, the pending home sales index in December was 10.9% higher than its level of 87.1 in December 2008. Pending sales of existing homes include single-family homes and condominiums. A home sale is pending when the contract has been signed but the transaction hasn't closed. Pending sales typically close within one or two months of signing.

The tax credit helped sales last year, as did low prices and mortgage rates. The tax credit was due to run out Nov. 30 but was extended and expanded, through April 2010. But the market is still facing the problems of high unemployment and the difficulty many borrowers are having obtaining loans. While a Federal Reserve survey of senior loan officers Monday showed that banks had largely stopped tightening loan standards, residential mortgages were an exception. Some 17% of banks said they were making mortgage-approval standards tougher even for borrowers with high credit scores and well documented credit histories.

By region, pending sales in the Northeast rose 2.3% in December and were 14.9% higher than a year earlier. The Midwest rose 5.2% in December and was 8.7% higher than a year earlier. The South climbed 2.2% in December and was 5.5% higher than December 2008. The West fell 3.8% in December but was 18.6% above a year earlier.

A top House Democrat on Friday said his committee was preparing to recommend "abolishing" mortgage-finance giants Fannie Mae and Freddie Mac and rebuilding the U.S. housing-finance system from scratch.

Barney Frank

"The remedy here is...as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance," said Rep. Barney Frank (D., Mass.), the chairman of the House Financial Services Committee.

His comments initially rippled through bond markets on concerns that the government might pull away from the mortgage market. Many believe that's unlikely and that any revamp would include continued government involvement. The government took over the companies in September 2008 as loan losses mounted.

Some Republicans have argued that the companies should ultimately be reduced in size and privatized, while at other end of the spectrum, some analysts have recommended turning the companies into government agencies. But several industry groups and academics have suggested that the government is likely to continue playing at least some role in the future of the companies.

One such report came from analysts at Standard & Poor's this past week. "It's hard for us to imagine" how enough capital could be attracted to replace Fannie and Freddie with stand-alone private companies that would be able to offer low-cost funding for 30-year fixed-rate mortgages, the analysts wrote.

Some analysts have argued that starting from scratch could create more problems than they would solve, in part because Fannie and Freddie own or guarantee around half of the nation's $11 trillion in home mortgages. "Blue sky ideas are great, but they take a long time to happen," said Mahesh Swaminathan, senior mortgage strategist at Credit Suisse, at a conference last month. "When you have $5 trillion of agency mortgages, you can't really orphan them."

Mr. Frank, who didn't elaborate on forthcoming recommendations, said last month that one possible revamp could merge some functions of Fannie and Freddie that overlap with the Federal Housing Administration into the government mortgage-insurance agency.

The Obama administration said it will weigh in on how to revamp the companies—and the entire housing-finance system—when it releases its budget next month. Republicans have increasingly criticized the administration for moving to overhaul the financial sector without spelling out plans for Fannie and Freddie.

In a PBS interview on Thursday, Treasury Secretary Timothy Geithner said the legislative process to overhaul Fannie, Freddie and the housing-finance system was unlikely to begin this year. "It's just a complicated thing to get right," he said. "But we are completely supportive and agree completely with the need to make sure that we take a cold, hard look at what the future of those institutions should be in our country."

Eugene Dumais noticed a large crack in the side of his house as he was leaving for church around 9:45 a.m. When he returned, a 10-foot-wide section of retaining wall had slid away. Elsewhere in the 80-home Rivermist subdivision, soil gave way and left crevices up to 15 feet deep and eight feet wide.

Associated Press

Crevices, some 15 feet deep, are shown outside three homes at the Rivermist subdivision in San Antonio on Monday.

"It's bad, and it has gotten a lot worse," Mr. Dumais said. He was among dozens of homeowners evacuated over the weekend from the neighborhood—a freshly built enclave where home prices range from $170,000 to $250,000.

Centex Homes, a unit of Pulte Homes Inc., told about 250 residents who crowded into a hastily called meeting at a local hotel Monday evening that it had yet to determine what caused the mishap, though it said the soil weakness occurred in a relatively isolated area. An executive said the company planned to start "forensic" work Tuesday, a process expected to take a couple of days.

Residents of more than 60 of the 80 homes vacated under a mandatory evacuation order by the city have been told they can return. Still, many at Monday night's meeting weren't anxious to return without a better explanation from Centex.

"The biggest concern is marketability and safety," Mr. Davis said. "Why would someone buy a house that is in the pathway of damage, and may continue to be?"