The upside of the housing crash is that the world now sees the folly of a system where private entities like Fannie Mae and Freddie Mac gamble with public money, earning huge profits in a boom but leaving the risks to taxpayers in a downturn. After almost five years of public conservatorship, our legislators are finally planning to wind them down, and replace them either with a new public mortgage insurer with too few safeguards (the Senate plan) or nothing (the House plan). A better option lies in between: a more limited public entity that charges high enough fees to be irrelevant in good times, but that remains as a backstop insuring the mortgage market against collapse.
During their heyday, the mortgage giants claimed that the insurance they provided lowered borrowing costs and increased homeownership rates, all at no cost to the American taxpayer. We now know better. Ultimately, taxpayers had to cover the costs of their risk-taking with an almost $190 billion bailout.