Calling for increased private-sector involvement in housing finance, James Bullard, president of the Federal Reserve Bank of St. Louis said mortgage financing "turned out to be an exceptionally weak link" as the current economic crisis unfolded. Hosting a conference to discuss the role of government-sponsored enterprises in mortgage finance, Bullard said Fannie Mae and Freddie Mac don’t work as they were intended to and the "current situation (is) an opportunity to reform housing finance according to best principles and sound lending practices." "To the extent possible, we need to let the private sector provide the bulk of U.S. housing finance going forward, without the incentive-distorting set of government programs and taxpayer guarantees that caused our current system to collapse," Bullard said. "Those programs meant well, but ended up costing everyone dearly." He said the private sector may be able to allocate credit more efficiently and better shelter taxpayers from insolvency risk. The continual changes in the size and scope of the federal programs also hurt the market. "The extent of congressional meddling in this market has been astonishing to the point where one can barely identify what the private sector outcomes would be in the absence of intervention," Bullard said. "It makes little sense to try to design programs that subsidize everyone. If everyone is subsidized, then no one is subsidized." Bullard, who is a voting member of the Federal Open Market Committee, wants to see subsidies to lower-income and first-time buyers disentangled from housing finance and more broadly defined. He also wants the subsidies to be reviewed regularly and subject to congressional approval for appropriation of funds. He suggested folding these functions into the Department of Housing and Urban Development. He believes loan-to-value ratios of 80% or less adequately insure against most housing price fluctuations. Additionally, homeowners with higher loan-to-value ratios "could be required to purchase default insurance or to increase the amortization component of their mortgage payments." Increased transparency and insurance requirements may also improve the system, according to Bullard. Home loans bundled into mortgage-backed securities should be constrained to loans with average principal balances and loan-to-value ratios of 80%. And in an attempt "to avoid one-sided bets, financial intermediaries could be required to purchase insurance or otherwise appropriately hedge their MBS portfolios. Write to Jason Philyaw.