Editor's note: This is the third in a three-part series. See Part 1 and Part 2. The first two articles in this series indicated that there was no quick way to replace Fannie Mae and Freddie Mac without seriously disrupting the market. An expansion of portfolio lending by depository lenders cannot fill the void, and revival of the private secondary market that collapsed during the crisis is neither feasible nor desirable. The best available option is a slow fix where existing mortgage banks and perhaps other firms converted to Danish-style mortgage banks, with temporary assistance from Fannie and Freddie. This would create a robust secondary market in which mortgage banks retain full liability for every security they issue -- as opposed to the fair-weather market we had before in ...
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