* White House faced pressure to replace current FHFA chief
* Republicans likely to oppose Watt's nomination
* Watt sought improved loan access for minority, low-income borrowers
WASHINGTON, May 1 (Reuters) - U.S. President Barack Obama on Wednesday nominated a veteran Democratic congressman to oversee mortgage financiers Fannie Mae and Freddie Mac , a choice that could set up a contentious political debate over housing policy.
Representative Mel Watt, a longtime consumer advocate who serves on the House Financial Services Committee, understands the roots of the housing crisis, Obama said at the White House.
"He knows what it's going to take to help responsible homeowners fully recover and he's committed to helping folks ... who work really hard, play by the rules, day in and day out, to provide for their families," he said.
The 67-year-old North Carolina lawmaker is expected to face a tough confirmation battle in the Senate, where Democrats are likely to need some Republican support to get Watt approved.
If confirmed, Watt would replace Edward DeMarco, a career civil servant who has led the Federal Housing Finance Agency in an acting capacity since 2009.
Consumer and housing advocacy groups, along with some Democratic lawmakers, had piled pressure on Obama in recent months to replace DeMarco. The regulator blocked a White House proposal to let government-controlled Fannie Mae and Freddie Mac slash mortgage debt for borrowers who owe more on their taxpayer-backed loans than their homes are worth.
DeMarco has argued that there are other ways to help distressed homeowners that pose less risk to taxpayers, and Republicans see him as a trusty steward for the public.
The nonpartisan Congressional Budget Office said in an analysis on Wednesday that the government could actually save money and reduce foreclosures if Fannie Mae and Freddie Mac participated in a principal forgiveness program. The study, was requested by a group of House Democrats, including Watt.
"We need someone that will stand up for borrowers," said Tracy Van Slyke, co-director of The New Bottom Line, which is leading a grassroots campaign called "Dump DeMarco." "This is an important victory. It's a good day for millions of homeowners."
Fannie Mae and Freddie Mac, which currently back about half of existing U.S. home loans, were seized by the government in 2008 as mortgage losses mounted. They have received $187.5 billion in taxpayer funds to stay afloat, while paying about $58 billion to the Treasury in dividends.
Republicans pin Fannie Mae and Freddie Mac's 2008 failure on government efforts to extend credit to unworthy borrowers.
"I could not be more disappointed in this nomination. This gives new meaning to the adage that the fox is guarding the hen house," said Senator Bob Corker, a Tennessee Republican who sits on the banking committee that will consider whether to send Watt's nomination to the full Senate for approval.
"The debate around his nomination will illuminate for all Americans why Fannie and Freddie failed so miserably."
During his two decades in the House of Representatives, Watt has fought against predatory lending and pushed for increased loan access for minority and low-income borrowers.
"This move will help the administration build support on the left, which is necessary for the impending budget battles, and it puts Republicans on the other side of a credible nominee," said Isaac Boltansky, a policy analyst with Compass Point Research and Trading.
Obama had nominated North Carolina banking commissioner Joseph Smith for the position in 2011, but he was blocked by Republicans and eventually withdrew his name from consideration.
Before settling on Watt, a former chairman of the Congressional Black Caucus, Obama had considered economist Mark Zandi, a registered Democrat who was an adviser to Republican Senator John McCain's 2008 presidential campaign. When Zandi's name surfaced, some conservatives made clear his ties to McCain were not enough to appease them.
In addition to weighing in on the question of loan forgiveness, the next FHFA director would be expected to guide Fannie Mae and Freddie Mac through an overhaul to reduce their dominant role in the housing finance system.
"Congressman Watt has a reputation for integrity, knowledge, and fairness. He certainly can't be said to be a shill for the far left," said Julia Gordon, director of housing finance and policy at the Center for American Progress, a group aligned with Democrats. "It is going to be hard to find a principled basis to oppose his nomination."
Democratic Senate Banking Committee Chairman Tim Johnson called Watt a "superb pick" and said he wanted to move the nomination expeditiously.
The response from Republicans, however, signaled a potentially long slog ahead.
"I am very concerned about this nomination," said Senator Mike Crapo, the top Republican on the banking panel. "By making a political appointment, the president is ignoring the importance that the head of the FHFA must be independent."