The first fix is rather simple: the Obama administration should declare that it will not exempt Fannie- and Freddie -backed mortgages from the 5 percent rule. Then it should push Congress to amend the Dodd-Frank Act to put F.H.A.-backed loans under the same risk-retention scheme as other mortgages.
Bankers and bureaucrats will no doubt object that this will raise the cost of lending. That’s possible, although if all lenders were subject to the same rules, free-market competition might lower costs to consumers in the long run. If asking banks to keep a larger share of risk on their balance sheets is a good idea, we should not allow a government-approved brand that flouts the new risk-retention rule.