The insolvencies and conservatorships of Fannie Mae and Freddie Mac in September 2008 have clearly established the inappropriateness of the “government-sponsored enterprise” (GSE) model for residential mortgage finance in the U.S. Two-and-a-half years later, however, the “$5 trillion question”—how to replace their presence in the secondary mortgage market—remains an open question.

The paper lays out a vision for how private markets would—if given the opportunity—replace the GSEs and provide a fully functioning secondary market for residential mortgages. In the event that the private sector is deemed inadequate for the task, this paper also proposes a “side-by-side” private/government form of mortgage guarantee that would be superior to the “tail risk” or “catastrophe” government insurance proposals that have circulated as alternatives to the GSEs.