Idea of the Day: Use Fannie and Freddie to Rebuild the Home Mortgage Market

If one concludes that the current housing crisis results heavily from laissez-faire ideology trumping common sense protection of safety, soundness, and consumers, then the logical remedy for the crisis and the future of Fannie Mae and Freddie Mac would be to require more effective regulation. This approach would start by stabilizing the GSEs through the appropriate actions being taken by the Treasury department—and then use them to rebuild a home mortgage market based on sound lending and securitization practices, effective oversight of private actors, and regulations to ensure that even private market actors act in ways consistent with the public interest. Over the long term, restructuring the GSEs would also require a rigorous system designed to better align who wins when there is profit, and who pays when there are losses.

This approach might involve following the lead of the Federal Insurance Deposit Corp, which is using its takeover of a major home mortgage lender, IndyMac Bank, earlier this year to showcase how emphasizing mortgage restructuring rather than foreclosure can reduce losses and mitigate the downward pressure on home values.

In this way, qualified low- and moderate-income borrowers who show low default rates when their mortgages are right-sized and originated with appropriate counseling and support would not now be sacrificed to Wall Street and governmental failures and again shut out of home mortgages.

Read more from CAP on the financial crisis:

The Future of Fannie and Freddie, by David Abromowitz

Real Solutions to the Financial Crisis, by Andrew Jakabovics