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How to privatize the mortgage market

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Despite the Dodd-Frank financial reform enacted in July, the mortgage market remains frozen and effectively nationalized. Today 90% of the $14 trillion in outstanding residential mortgages is controlled by the Federal Housing Administration (FHA), the Department of Veterans Affairs, or Fannie Mae and Freddie Mac—with the latter two under government conservatorship. The solution? Privatize the mortgage market. Fannie and Freddie have shown how government guarantees lead to dangerous risk- taking in which shareholders reap the profits but taxpayers pay for the losses. Even their most powerful longtime congressional patron, Barney Frank (D., Mass.), now agrees it is time to abolish these two government-sponsored enterprises (GSEs). Unfortunately, a popular fallback position is for the government to guarantee every middle-income residential mortgage directly. While that's arguably better than guaranteeing the GSEs, the underwriting standards for government-guarantee programs will assuredly collapse under political pressure, leaving the taxpayers once again holding the mortgage losses.

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