Any attempt to re-engineer a housing finance system with a new set of government-guaranteed entities would entail all of the risks of restoring the existing GSE's, plus more. The taxpayers would be exposed to similar potential hazards, but with new and inexperienced organizations engaged at the level of enterprise management and regulatory oversight.

The key to successful reform in housing finance is clarifying the public policy objectives. Vague and contradictory objectives played a large role in the catastrophe that befell Freddie Mac and Fannie Mae. In particular, the phrase “affordable housing” is gauzy and imprecise, and this creates a dysfunctional tension between public and private objectives.

Public policy should not seek to encourage mortgage borrowing as a means for promoting home ownership. Instead, home ownership should be presumed to embody a significant down payment (10 percent or more) and the gradual accumulation of equity. We should not encourage the dissipation of home equity through non-amortizing mortgage loans, cash-out refinancing, or second mortgages.

In recent years , the frenzy of mortgage lending fueled speculative purchases, with 15 percent of mortgage loans going for owners who were not occupants of the houses that they were financing.1 Moreover, the goal of encouraging thrift and the accumulation of assets was undermined by the proliferation of lending with loan down payments, exotic mortgage instruments in which principal is not reduced over time, cash-out refinancing, and second mortgages.

1See Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner, “The 2006 HMDA Data,” Federal Reserve Bulletin, December 2007, pp. A73-A109.