updated 1/8/2008 1:29:07 PM ET 2008-01-08T18:29:07

The housing market will weaken through 2009, with a turnaround unlikely until 2010, the chief executive of mortgage finance company Fannie Mae said Tuesday.

Fannie Mae CEO Daniel Mudd said the mortgage crisis and its effect on the housing market will be a drag on the entire U.S. economy, and he urged lawmakers and lenders to pursue "the most generous means possible" to help out borrowers facing sharply higher mortgage payments in the next few years.

"It is clear that there is no single magic bullet," Mudd said in prepared remarks at a conference of the U.S. Chamber of Commerce. "The most effective steps, historically, are solutions that buy time to restore normal housing supply and demand."

A new plan orchestrated by the Bush administration to help distressed homeowners with high-priced mortgages with a five-year freeze in mortgage rates "is an important step," Mudd told the business audience. Treasury Secretary Henry Paulson on Tuesday said the administration was exploring a possible expansion of the program to include borrowers of home loans at prime, conventional rates.

The health of corporate America this year will depend on "how we get through the toughest housing correction in our lifetimes," said Mudd.

He reaffirmed the prediction made recently by Fannie Mae, the largest financer and guarantor of U.S. home loans, that American home prices will fall by 10 percent to 12 percent from their 2005 peak before the housing market can rebound, likely in 2010. The Washington-based company, which lost $1.4 billion in last year's third quarter, expects to lose money this year on eight to 10 of every 1,000 mortgages held on its $2.4 trillion book — a steep increase from four to six in 2007.

Fallout from the slump has forced Fannie Mae and its smaller government-sponsored rival Freddie Mac to set aside billions of extra dollars to account for bad home loans, eroding their profits at a time when home prices are falling and foreclosures are spiking on high-risk mortgages made to borrowers with weak credit histories.

Last month, the two companies sliced their dividends and sold billions of dollars of special stock to raise capital and shore up their finances. They traditionally have been a major source of funding for the home-loan market by buying up mortgages made by banks and other lenders and then bundling them as securities for sale to investors.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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