With Treasury’s decision to defer GSE reform, we conclude that the bastions of U.S. housing finance are, like Ozymandias, “two vast and trunkless legs of stone.” In conservatorship, Fannie Mae and Freddie Mac must now bow to a larger power, the U.S. Treasury. The GSEs’ function is to serve the Administration’s will as that will is defined from time to time by the exigencies of the mortgage-market moment. Would a plan now limit Treasury’s discretion? No, but it would have defined its parameters because a path would be marked to get us out of the “lone and level” sand in Shelley’s timeless poem.

We know Treasury is busy, with nary an extra penny of political capital to spend on the GSEs, let alone the still broader rewrite of U.S. residential finance Secretary Geithner promised on Wednesday. However, we also know that the mortgage market remains very, very fragile. Fannie and Freddie are only immune from liquidation because of Treasury’s Christmas Eve decision to provide as many hundreds of billions as it will take to keep what’s left of their “mighty visages” above water through 2012. Mr. Geithner also made clear that the U.S. Government’s support for the GSEs is unwavering, essentially converting all their obligations into explicit USG ones despite the lack of statutory power to do so. This keeps all as is for now, but how long is now and what happens next? How can any private player in U.S. mortgage finance contemplate its future without some sense of what the secondary-market behemoths will become?

In fact, it’s not just the future that’s in doubt in this uncertain state of play. The most recent developments at Fannie and Freddie point to how hard it is to forecast even short-term developments. A case in point is Fannie’s Monday announcement that it will start a warehouse-lending pilot program. This comes even as the GSE’s regulator, the Federal Housing Finance Agency, told Congress that it has blocked all new products for both GSEs because of the risk attendant to them while Fannie and Freddie remain in conservatorship. Yet, days later, Fannie goes into a new venture. Was it one approved before the public ban? Was it deemed not really new because it’s just a “pilot?” Or, are we still just making it up as we go along based on day-to-day needs like those that smaller mortgage bankers hope will be met through new GSE warehouse loans?

An even more perplexing problem comes as one tries to assess what the prospect for mortgage foreclosures are and, with them, the odds of a market recovery. Will the HARP program that provides refinancings to prevent foreclosures be extended? If so, how? Will the GSEs mandate principal reductions, taking it out of their servicers’ hides or, even, venturing into servicing themselves? The new-product ban noted above doesn’t, the regulator says, preclude new loan-modification products. So, anything’s game as long as it comes in tandem with foreclosure prevention.

What the GSEs do for whom how will not only dramatically redefine mortgage markets, but also begin a de facto reconfiguration of Fannie and Freddie. Mr. Geithner Wednesday says he wants a less risky role for the federal government going forward. Absolutely anything he proposes will be an improvement over what went before. But, Secretary Geithner will find his choices inevitably constrained by what he does with Fannie and Freddie in the meantime. The more they meet national, not financial, goals, the larger the GSEs’ negative net worth. The bigger this is, the higher the cost to taxpayers of digging the GSEs out and restructuring them into anything that doesn’t simply paper over the losses and start the cycle all over again.