If not a hybrid, then what?

I kind of liked the hybrid model of mortgage funding. The pure public sector doesn’t do that well (FHA underwriting is not all it should be); the pure private sector also doesn’t do so well (beyond the subprime mess, there is very little liquidity even in the prime jumbo market right now).

Where I was mistaken was to think 2.5 percent capital was sufficient backing for the GSEs–I thought home mortgages were so safe, that 2.5 percent plus a stress test would be OK. I was wrong. And it is becoming increasingly clear that the GSEs’ managements were reckless with the charters, which gives evidence that Robert Van Order’s powerful argument that GSE management would never want to screw up a wonderful franchise was also incorrect.

So maybe the correct answer is a hybrid with more capital–say 5 percent. After all, thanks for FDIC and the Federal Home Loan Bank System, Banks are really hybrids too.