CONTRARY TO what you may have heard, reducing the federal role in the housing market is not a radical free-market notion. In fact, after a $187 billion taxpayer bailout of Fannie Mae and Freddie Mac exposed the misallocation of resources that those two institutions had fostered for decades, reform enjoyed high-level Obama administration support: “I think it’s absolutely the case that the U.S. government provided too much support for housing, too strong incentives for investment in housing,” then-Treasury Secretary Timothy F. Geithner said in a Feb. 11, 2011, speech at the Brookings Institution. His department produced three options for a Fannie-free future.

Three years later, Mr. Geithner is on the former-official book tour, and the work he and many others poured into rethinking housing finance is looking increasingly like wasted effort. Mel Watt, the federal housing regulator who serves as Fannie and Freddie’s de facto chief, mounted the podium at the Brookings Institution on Tuesday to declare that he will henceforth focus on keeping the two entities alive more or less as is. To help ease the flow of mortgage credit, which has been drying up absent a permanent Fannie-Freddie fix, Mr. Watt will forgo planned contraction of the “conforming” loan limit for securitized mortgages and relax the perfectionism with which Fannie and Freddie had previously treated the loans it purchases. Item One in his new strategic plan for the entities, Mr. Watt announced, is to “MAINTAIN” — all-caps in original — “foreclosure prevention activities and credit availability for new and refinanced mortgages.”

You can call this a victory for defenders of the status quo who backed Mr. Watt to replace Edward DeMarco, an advocate of aggressively winding down Fannie and Freddie. Or, equally validly, you can see Mr. Watt’s declaration as a recognition of reality — economic and political. The economic reality is that there is still no good private-sector alternative to the Fannie-Freddie duopoly. And the political reality is that Congress has failed to legislate one. The only bipartisan bill has foundered in the Senate Banking Committee. Though it’s still likely to pass a scheduled committee vote on Thursday, six key liberal Democrats have declared themselves opposed, which probably dooms its chances on the Senate floor. The left objected that the bill’s subsidies for low-income borrowers were insufficient — which sounds to us like a complaint that it lacked the kind of credit set-asides that created damaging conflicts of interest for Fannie and Freddie.

The big winners from this turn of events, ironically, may be not the poor and the “underserved,” but a group of giant hedge funds that snapped up millions of beaten-down Fannie and Freddie shares after the government bailout, and are now lobbying Congress — as well as suing in federal court — for a return to private ownership, albeit with what the hedge funds say would be stronger protections against excessive risk-taking. Thus would a huge taxpayer investment in rescuing Fannie and Freddie pave the way for a colossal windfall for bottom-feeding Wall Street types. The longer interest-group squabbling prevents Congress from enacting a better approach, the more time the hedgies have to achieve the outcome that favors them.