Two Essential Fixes for Fannie, Freddie

Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote) have begun to address mortgage underwriting practices that helped lead to the credit crisis, even as Congress wrestles with bigger questions about the future shape of the mortgage giants.

Freddie Mac, the smaller of the two government-sponsored enterprises placed in conservatorship by federal authorities last month, recently informed banks and thrifts that it will stop buying stated-income, or so-called Alt-A, mortgages early next year. These loans carry more risk because borrowers have not documented their ability to repay them. But Fannie and Freddie continue to purchase other loans with special risks, such as mortgages with down payments financed by second mortgages, also known as "piggyback" loans.

The government is mulling how to structure the GSEs going forward, with options ranging from allowing them to continue as government agencies or privatize them and splitting them up. Federal Reserve Chairman Ben Bernanke on Friday said some form of federal backing of the two companies would probably be necessary. ...