Four Ways to Start Fixing Fannie And Freddie

3. Lower Conforming Loans

One simple fix or experiment would be to reduce the ceiling for conforming or conventional loans, which qualify a borrower for federal guarantees. The current level for a single-family house --$417,000-- is double that of 1996. In high cost areas, the level is higher, reaching a maximum of almost $730,000.

That limit could be based on the median price of a home in a given metropolitan area,

"Start ratcheting down the conforming loan limit, year by year," says Pollock. "Guess what? Mortgages will be slightly more expensive but why would we want to subsidize mortgages? All you do is succeed in making housing prices higher."

Proponents say the change would take Fannie and Freddie out of more markets, leaving it strictly up to the private sector.

"It's kind of a back door way of trying to force them out of the business," says Ely.

Yet, even basic proposals such as this, touch a lot of nerves and trigger somewhat ideological debates.

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"If we're going to experiment with the housing market let's experiment with the high end," says Calabria. "There's no rationale to passing on a subsidy" to higher income people.

"There's no wisdom in that," counters Melissa Cohn, founder and CEO of Manhattan Mortgage in New York City. "We're trying to support the value of real estate."

Whether it is small fixes or big ones, much of the current opposition in political, business and policy circles turns on how anything might endanger the fragile nature of the real estate recovery.

"I think transition measures have to be carefully designed," says David Min, associate director for financial market policy at the Center for American Progress. "The goal in the short-term should be to preserve the housing market so we don't have a double dip. And drastic change needs to be implemented slowly and only upon the re-emergence of private sector lending."

Skeptics say that's helped make a big problem even bigger.

At this point, some 96 percent of all U.S. residential mortgages are backed by the federal government. Fannie and Freddie are essentially embedded in the economy because they own or guarantee $5.5 trillion in mortgage debt, half the current market.

4. Better Lending Practices

Other small steps can be taken from a further tightening in lending standards to requiring larger down payments, particularly in the case of FHA loans.

"I think that's absolutely reasonable," says Cohn, the broker. "I think people need to have skin the game."

At this point, all agree that Uncle Sam can no longer afford to run the game and that Fannie and Freddie need to be made much smaller and more narrowly-focused government entities or essentially privatized through an orderly and gradual sale of their assets and assumption of debt.

"The fundamental problem is that there isn't any fix for them other than their ultimate dissolution," says Ely.

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