As mortgage giants Fannie Mae and Freddie Mac near a deal that could lower barriers and restrictions on borrowers with weak credit, it’s hard not to wonder if Americans have learned anything from the 2008 financial crisis. When the nation’s housing market crashed, these companies owed the U.S. government $187 billion .Clearly, it had become far too easy for borrowers with bad credit to get approvals for mortgages and for families to borrow more than they could afford. Virtually everyone agreed that officials needed to fix this problem so that it never happened again. In a column for the National Post on July 12, 2008, David Frum, a former speechwriter for George W. Bush, cleverly summed up the sentiment at the time when he wrote:

“The shapers of the U. S. mortgage finance system hoped to achieve the security of government ownership, the integrity of local banking and the ingenuity of Wall Street. Instead, they got the ingenuity of government, the security of local banking and the integrity of Wall Street.”

Given such sentiment, few would have imagined that during the next six years Fannie Mae and Freddie Mac would continue to provide the vast preponderance of the new single family mortgages being issued in this country. Rather than wind down their role, while operating under conservatorship, their market share has increased and there have been few real changes to the housing finance system. In fact, the concept of “qualified mortgages” in the Dodd Frank bill, which was supposed to ensure that banks retain some of the risks for the mortgages they wrote, has now been watered down to the point where the only mortgages for which banks need to retain a risk position on their balance sheet are those where borrowers are paying more than 43% of their income. And once again, Fannie Mae and Freddie Mac are guaranteeing mortgages with as little as a 3.5% down payment.

We would like to propose, as have some others, that the Federal Housing Finance Agency. which oversees Freddie and Fannie, take a significant step and begin to get the se companies out of the business of refinancing home mortgages. By doing so, the agency will reduce, over time, the $5.3 trillion they currently guarantee, focus on the home ownership and job creation sides of their activities and offer the private sector an attractive new market. According to the Department of Housing and Urban Development, over 50% of the single family mortgages these agencies purchased the last 15 years were to refinance existing mortgages.

What is the appropriate role for Fannie Mae and Freddie Mac? Some people say the mortgage market would behave better privatized than propped up by Fannie Mae and Freddie Mac. Others cite the fact that since these agencies control such a large share of the present mortgage market, it would be disastrous to phase them out.

A number of people have put forth thoughtful proposals for reforming the housing finance system, including the Bipartisan Housing Commission and its Mortgage Finance Reform Working Group. These proposals try to deal with fundamental flaws in our system such as the fact that the private sector continues to push virtually all of the risk onto U.S. taxpayers. However, because we are not in crisis and because Fannie Mae and Freddie Mac have repaid their loans and are operating profitably, serious efforts at reform are not gaining much traction.

Without taking sides in this debate, continuing to allow these agencies to make new loans to facilitate purchase of a persons prime residence seems an idea that should be acceptable to both sides. As long as these agencies continue to exist, a good case can be made that helping people purchase homes serves a useful public purpose and helps create jobs. In this role, these agencies can also ensure that there is adequate capital and liquidity in the mortgage market.

In contrast, there is little public purpose in refinancing most home mortgages. Why should Fannie Mae, Freddie Mac and the U. S. taxpayer subsidize homeowners who want to lower the mortgage rate on their home from 5% to 4%? And why should they subsidize homeowners who want to pull money out of their house by taking on a bigger mortgage? It is noteworthy that, in a single quarter in 2006, borrowers pulled out $84 billion dollars of net equity in cash-out refinancings, some portion of which became part of the $187 billion bailout. By guaranteeing the mortgages in a refinancing, Fannie Mae and Freddie Mac are both subsidizing the homeowners and taking on greater risk.

Even with this relatively simple proposal, there are a number of issues that will require further discussion. For example, should Fannie Mae and Freddie Mac continue to finance second homes or refinance mortgages to enable borrowers to make significant home improvements? Should they guarantee loans that might help a homeowner avoid foreclosure?

While refinancing may have limited public purpose, it seems like an ideal product for the private market. Banks can still process these loans and then securitize them to institutional investors. We believe institutional investors would love a security backed by mortgages made to homeowners with stellar track records of on time payments, especially if this pool of mortgages offered a slightly higher rate than a Fannie Mae or Freddie Mac pool. If the rate or terms were too onerous, the homeowner could stay with the existing mortgage.

Will this prop osal to phase Fannie Mae and Freddie Mac out of the business of refinancing home mortgages fully protect U.S. taxpayers. No. But it might significantly reduce the potential losses. By narrowing the scope of Fannie and Freddie’s activities, it will ensure that we are no longer responsible for borrowers who overleveraged through cash out refinancing. Ideally, as the private sector gets more involved in the mortgage refinancing market, it will set the stage for greater involvement in other areas of the housing finance market.

Few people believe that the current mortgage finance system is sustainable over the long run. And fewer still believe that the government has taken the steps necessary to protect the U.S. taxpayer from another bailout. While the next disaster may not be the same as the last one, we believe that action needs to be taken. As Mark Twain warns us, “History doesnt repeat itself, but it does rhyme.”

John Vogel is an adjunct professor at the Tuck School of Business at Dartmouth College, where he teaches courses in real estate and entrepreneurship in the social sector. Bill Poorvu is an adjunct professor in entrepreneurship emeritus at Harvard Business School.

A U.S. federal judge on Tuesday threw out two suits from investors in Fannie Mae FNMA and Freddie Mac FMCC that aimed to stop the transfer of their profits to the U.S. Treasury, in what may set a decisive precedent for over a dozen similar actions.

Judge Royce Lamberth ruled that the government is entitled under the terms of a 2012 amendment to the two mortgage giants bail-out deals, to sweep the vast majority of their profits into the Treasury.

The suits had been brought by investors including hedge fund Perry Capital LLC and Bruce Berkowitz, the head of Fairholme Capital Management. Fairholme itself has a separate suit currently in the pretrial discovery phase, and Bill Ackmans Pershing Square Capital Management LP also has a suit pending.

Fannie Mae and Freddie Mac were taken over by regulators in 2008, as their losses on poor-quality mortgages and related products ate through their capital. They received some $188 billion in support from the government before a revival in the housing market restored them to profitability.

In 2012, the Treasury had tried to ensure it got a proper return on the money it had thrown at the two companies, ordering them to pay it a quarterly dividend amounting to nearly all of their profits.

Judge Lamberth ruled that Congress had given the Federal Housing Finance Agency and the Treasury Department the power to take the companies profits as a provision of the Housing and Economic Recovery Act.

That order may “raise eyebrows, or even engender a feeling of discomfort,” Judge Lamberth ruled, “But any sense of unease over the defendants’ conduct is not enough to overcome the plain meaning” of the law.

The ruling provoked an instant outcry from investors, many of whom have bought Fannie and Freddie stock in anticipation of winning such suits.

Investors Unite, a grouping of nearly 1,000 private investors in the two companies, said it doubts that Congress ever intended for the conservatorship to lead to nationalization of the GSEs with no compensation for shareholders.

We look forward to reviewing what comes out of discovery in the Fairholme trial, they added.

Fannie and Freddie shares had flatlined near zero for nearly four years before the wave of shareholder lawsuits drove them to rise nearly 15-fold. However, they have given up nearly 40% of their value in the last four months as the suits appeared to lose momentum. Both stocks fell around 7% late Tuesday in the wake of the ruling.

By Nate Raymond, REUTERS

HSBC Holdings will pay $550 million to resolve a U.S. regulators claims that the British bank made false representations in selling mortgage bonds to Fannie Mae and Freddie Mac before the financial crisis.

The settlement announced Friday between the banks U.S. unit and the Federal Housing Finance Agency, the conservator for the two government-controlled mortgage finance companies, came less than three weeks before a Sept. 29 trial in New York, where HSBC has said it could have faced up to $1.6 billion in damages.

The deal is the latest arising from 18 lawsuits that the FHFA filed in 2011 to recoup losses on $200 billion in mortgage-backed securities sold to Fannie Mae and Freddie Mac, which the U.S. government took into conservatorship amid the 2008 economic crisis.

The lawsuit accused HSBC of falsely representing to Fannie Mae and Freddie Mac that loans underlying $6.2 billion of mortgage-backed securities sold from 2005 to 2007 met underwriting guidelines and standards.

HSBC has denied the allegations, and did not admit wrongdoing as part of the settlement. The bank stopped issuing residential mortgage-backed securities in 2007.

We are pleased to have resolved this matter, Stuart Alderoty, general counsel for HSBC North America, said in a statement.

Under the settlement, HSBC will pay $374 million to Freddie Mac and $176 million to Fannie Mae, the FHFA said.

Along with settlements with other banks including Bank of America Corp, Deutsche Bank AG and Morgan Stanley, the FHFA has so far recovered nearly $17.9 billion. Last month, Goldman Sachs Group Inc agreed to a settlement that the FHFA valued at $1.2 billion.

Lawsuits remain pending against Nomura Holdings Inc and Royal Bank of Scotland Group Plc. The FHFA said it remains committed to satisfactory resolution of these actions.

Many of the banks settled after U.S. District Judge Denise Cote, who has overseen most of the FHFA litigation, issued several rulings making it harder to mount defenses.

The deal with HSBC came after it last month lost a bid to dismiss the case as untimely, in light of a recent U.S. Supreme Court ruling.

A federal judge on Wednesday ordered Bank of America to pay $1.27 billion in damages over shoddy mortgages sold to Fannie Mae and Freddie Mac just before the housing crisis.

Last fall, a jury found the countrys second-largest bank liable for fraud over the sale of bad mortgages to the government-backed entities by its Countrywide Financial unit during 2007 and 2008. Judge Jed Rakoff said in his order on Wednesday that Fannie Mae and Freddie Mac bought $2.96 billion worth of loans from Countrywide in what he called an intentional scheme to defraud the mortgage providers (Rakoff noted that only 42% of those loans turned out to be materially defective, which is why he reduced the damages).

Rakoff also ordered former Countrywide mortgage executive Rebecca Mairone, who pleaded guilty in the fraud case earlier this year, to pay $1 million in damages for her role in defrauding the government-backed firms.

Writing about Countrywides sale of the defective mortgages in his order, Rakoff says it was from start to finish the vehicle for a brazen fraud by the defendants, driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole.

Lawrence Grayson, a Bank of America spokesman, told Fortune: We believe that this figure simply bears no relation to a limited Countrywide program that lasted several months and ended before Bank of Americas acquisition of the company. In terms of an appeal, were reviewing the ruling and well assess our appellate options.

Bank of America agreed to pay more than $4 billion to acquire Countrywide in January 2008, at the start of the fiscal crisis, in a deal that was completed later that summer.

Bank of America has been taking a beating over its various legal issues, mostly related to the sale of mortgages and mortgage-backed securities. The bank, whose second-quarter profits fell 43% on $4 billion pre-tax litigation expenses, continues to negotiate with the Justice Department over the exact size of a mortgage-securities settlement. Bank of America is offering $13 billion while the government is negotiating for more.

You didnt think you were going to get off that easy, did you America?

The housing market has made huge strides in recent yearsCore Logic, for instance, reported Tuesday that home prices increased by 10.5% year-over-year in April, marking the 26th straight month of price gains. But while its generally better to see rising home prices than the opposite, the rapid rise in values has masked problems in both the real estate market and the economy.

After all, another way of saying that home values are high is that the cost of housing is high, and normally we dont like to celebrate the expensiveness of staple goods. It would be one thing if home prices were rising fast because the economy was booming and home builders just couldnt keep up. But thats not the case. In fact, construction spending has been flat, and single-family housing starts remain well below their pre-crisis norms.

What has really been driving the appreciation of home prices more than anything else is a lack of supply. Check out the chart below from Calculated Risk,  which shows how the supply of homes on the market has deteriorated in recent years.

As you can see, inventory tends to peak during the spring and summer months. However, when the housing recovery began in earnest in the spring of 2012, the market bucked that trend, with inventory falling precipitously. And though it appears that 2013 will be the bottom in terms of housing inventory, the number of homes for sale is far below what you would expect in a normal market.

Whats behind these dynamics? A few things: For one, many homeowners and home-owning institutions have kept their property off the market in hopes of higher prices in the future. But the large number of homes that remain underwater have also contributed to the problem. A study released last month by online real estate data company Zillow estimated that 10 million Americansor 18.8% with home loansowe more on their homes than they are worth.

Those folks are often unable to put their homes on the market because of penalties or other restrictions against short sales. Whats worse is that these properties are often concentrated in a few hard-hit cities and regions. Peter Drier, director of the Urban and Environmental Policy Institute at Occidental College, points out that one in 10 Americans live in one of the 100 cities hardest hit by the foreclosure crisis, places where 22% to 56% of homeowners are underwater.

These cities and neighborhoods are not experiencing any kind of housing recovery, and in the absence of a concerted effort by the federal government to help them, state and local governments have been stepping up. The latest example is Massachusetts Attorney General Martha Coakleys decision to sue the Federal Housing Finance Administration (FHFA) as well as Fannie Mae and Freddie Mac, the housing finance companies that the FHFA oversees.

Massachusetts suit, filed Monday in Suffolk Superior Court, alleges that the FHFA has refused to sell mortgages it owns to the nonprofit organization Boston Community Capital (BCC). BCC seeks to buy foreclosed or nearly foreclosed homes and then sell them back to the homeowner at a fair market value, helping to keep families in their homes and restoring a sense of ownership within the community. This surely helps the homeowners, but it also makes sense for lenders and the wider community who get to avoid the costly and drawn-out process of vacancy and resale. According to Elyse D. Cherry, CEO of BCC, Its a good idea for everybody. Its more effective for lenders to sell to us, especially because were cash buyers.

But, according to Cherry, the FHFA has a policy of refusing to engage with organizations that sell foreclosed properties back to the former homeowners, which constitutes a violation of a 2012 Massachusetts law passed to help ease the states foreclosure problems. Cherry gives the example of a home in Dorchester that her organization tried to buy from Freddie Mac for a fair market value of $115,000. The BCC had agreed to the deal with the organization that had foreclosed on the property on behalf of Freddie Mac. But when Freddie Mac got wind that BCC was the buyer and was going to sell the property back to the former homeowner, it would only agree to sell it to BCC for the full amount due at the time of the foreclosure, roughly $300,000. A spokesman from the FHFA declined to comment on the suit.

Basically, the BCC is acting as a private facilitator for a mortgage principal reduction  program. Principal reduction aims to help both the borrower and lender by lowering the total amount owed, helping avoid costly foreclosure processes and keep people in their homes. Private lenders like Ocwen financial have had some success adjusting borrowers mortgages with this process, but the FHFA has so far refused to even experiment with reducing mortgage principals.

Its difficult to say exactly what effect a change in policy from the FHFA would have on the foreclosure market. But given that Fannie and Freddie own or guarantee more than half of the mortgages in the U.S. the potential is huge. Ethan Handleman, vice president at the Center for Housing Policy, argues that a widespread program of principal reduction could be a win-win for taxpayerswho stand behind Fannie and Freddies portfolio of homesand homeowners, communities, and general economy. A housing bubble is the result of lenders lending too much and borrowers borrowing too much, he says, but all of the pain is landing on the borrower.