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As policymakers consider administrative reforms to Fannie and Freddie, they must address the problem of capital arbitrage to avoid overleveraging the mortgage system.
Lenders should be encouraged to hold more credit risk in the mortgage market, rather than having it foisted on Fannie and Freddie.
The GSEs are on their way to paying back the money they owed the government under the original bailout deal made at the height of the financial crisis, making 2018 an opportune time for an overhaul of the housing finance market.