Fannie and Freddie

There is renewed discussion about what to do with Fannie and Freddie. In today's NYTimes Andrew Sorkin channels Barney Frank to explain why reform will be difficult.

More important, shutting down Fannie and Freddie and having the private market step in, as politically popular a sound-bite as that may be, is economically unfeasible. For better or worse, Fannie, Freddie and Ginnie Mae were behind 98 percent of all mortgages in this country so far this year, according to the Mortgage Service News. Pulling the rug out from under them would be pulling the rug from under the entire housing market as it continues to struggle.

The GSE's may have repackaged 98 percent of all mortgages in the country, but they did not finance them. That still came from savers. The GSE's, after all, still need funds just to survive. The real question is why the private market cannot package and sell bundles of mortgages in the absence of the GSEs? We know they did this before the financial crisis.

Presumably, the private markets are less willing now to refinance mortgages with very low down payments. They probably have learned from their mistakes. The pressure to keep the GSE's derives from the desire to continue to make risky loans that the private markets won't make.

So the question is who did not learn from the crisis, private markets or the government?