Critics in Washington want to dump Freddie Mac and Fannie Mae, but they have no idea what to replace them with. (Lynne Sladky/AP)
Bethany McLean is a contributing editor at Vanity Fair and the author of "Shaky Ground: The Strange Saga of the U.S. Mortgage Giants."

If there’s one thing with which most of Washington has long agreed, it’s this: Fannie and Freddie must die.

That’s Fannie Mae and Freddie Mac, the mortgage giants that prop up much of the American housing market and have been operating under government control since the financial crisis seven years ago. “There’s a majority of people here that believe that they should be wound down and replaced so that the taxpayers are not backing them up as they are today,” is how Sen. Bob Corker (R-Tenn.) put it last week. In one of his few mentions of the topic, President Obama described Fannie and Freddie’s business model as “heads [they] win, tails taxpayers lose,” meaning that although their executives and shareholders profited in the good times, the implicit belief that the government stood behind them — which was the core of their business model — would force taxpayers to cover the losses in a crisis. Which we did.

The critics are right about the flaws of both institutions: Fannie and Freddie agglomerated too much political power before they went bust, and their drive for market share during the housing boom early in the past decade left taxpayers on the hook to bail them out.

But we still need Fannie and Freddie, even more now than before.

They own or guarantee the payments on more than $5 trillion in American mortgages, or about 60 percent of the total. In the years since the financial collapse, they have been the major source of credit for most people who got mortgages, and the only source of credit for less-than-pristine borrowers. Washington is paralyzed. Even Corker, when pressed, backed away from his call to eliminate them, because despite the hatred of the housing giants, collectively known as “government-supported entities,” or GSEs, no one wants to see what would happen without them, and no one can agree on how to replace them.

As a result, there’s no plan for how the United States will finance housing in the future. Without a housing finance policy, there is no housing policy. And that’s a huge problem, because another crisis — about how people will afford a place to live — is brewing.

Since 2008, while Fannie and Freddie have sat in limbo, homeownership has plunged. This summer, the Census Bureau reported that the homeownership rate had fallen to 63.4 percent, the lowest level in 48 years. (It had peaked at 69 percent, in 2004.) “Renter nation,” one blog called the United States. The decline is particularly pronounced in minority communities. At the Congressional Black Caucus Foundation’s annual legislative conference this year, housing advocates pointed out that the homeownership rate for the black population has decreased from nearly 50 percent in 2004 to about 43 percent, its lowest level in 20 years. It’s projected to continue to drop.

Pundits have argued that the homeownership rate was, and maybe still is, too high, because too many people were getting mortgages they couldn’t afford. But if people don’t own (and don’t sleep on the street), they rent — and rents have been steadily rising since 2000, while incomes have not kept pace. In the third quarter of this year, rents increased by 5.7 percent year over year, according to Morningstar, and they rose at a double-digit clip in some large cities such as San Francisco and Denver. (Rents in Washington were up just 1.44 percent year over year, according to the online real estate database Zillow, in part because of increased supply.) The Wall Street Journal recently noted that a pending merger of two companies that own single-family rental homes is predicated on rents continuing their rise.

Stan Humphries, the chief analytics officer at Zillow, has called what’s coming a “rental crisis.” According to Zillow’s data, while homeowners with a mortgage can expect to spend about 15.3 percent of their income on monthly housing bills, renters must plan to set aside almost double that share. As rents rise, it gets harder to save for the down payment required to buy a home. Add in the burden of student loans, and financial challenges increase. According to an analysis by Enterprise Community Partners and the Harvard Joint Center for Housing Studies, since the start of the 2000s, the number of severely cost-burdened renters in the United States — meaning those who pay more than half their income in rent — has risen substantially, from 7 million in 2000 to 11.3 million in 2013. The number is expected to keep increasing.

There’s a logical response to this, which is to use Fannie and Freddie for what they were designed to do: support homeownership for those who can afford it, and support the financing of multi-family housing that working people can afford.

In Washington policy circles, reviving the GSEs is considered something that shouldn’t be discussed in polite company. The complaints about their pre-crisis business model are accurate — but some of the other criticisms are wrong, and even contradictory.

One argument is that in their previous incarnation, Fannie and Freddie caused the financial crisis by helping unqualified people buy homes, in the name of following mandates from Congress to meet housing affordability goals. But the financial crisis wasn’t caused by putting people in homes. It was caused by people of all income levels speculating on homes as investment properties, and using their homes as credit cards, extracting money from them via cash-out refinancing. According to Jason Thomas, the director of research at the Carlyle Group, only about a third of subprime mortgages that were turned into mortgage-backed securities between 2000 and 2007 were used to buy homes. And a study published by the National Bureau of Economic Research in early 2014 found that the wealthiest 40 percent of borrowers obtained 55 percent of the new loans in 2006 — the peak year of the bubble — and that over the next three years, they were responsible for nearly 60 percent of delinquencies.

Another old criticism contradicts that one: In the 1990s, critics — from activists on the left, to American Enterprise Institute scholar Peter Wallison on the right, to the Congressional Budget Office — argued that Fannie and Freddie never did much to foster homeownership or lower mortgage rates. Maybe this was true in the golden years of the 1990s, when there was no shortage of private capital to be lent for real estate. But we certainly needed Fannie and Freddie in the wake of the crisis. And although there is a lot of analysis about what a market without government support would look like, the simple truth is that Fannie has been around for almost 80 years. Anyone projecting how the housing market would appear without it is just guessing.

Still, there is fairly widespread agreement that some things we take for granted, such as a 30-year, fixed-rate, pre-payable mortgage, wouldn’t exist without a government backstop. Investors simply don’t want that risk. That’s part of the reason Congress has done nothing with the institutions since the government took them over. Without the government support, not much would change for the very wealthy. But most analysts agree that a great swath of the middle and lower class probably would get five- to 15-year mortgages with floating rates, rates that would vary significantly depending on income and geography. Mortgage capital might be hard to come by in times of stress. Home prices probably would decrease. With an affordable-housing crisis in the works, and when even the Wall Street Journal is publishing essays about the squeeze on the middle class, it is probably not politically feasible or wise to experiment if you care about the social fabric of the country.

Most supposedly “free market” solutions assume that the big banks would take greater control of the mortgage market without Fannie and Freddie. But the big banks were bailed out in 2008, too. The Dodd-Frank financial reform legislation may have fixed the “too big to fail” issue. (That’s debatable, but give it the benefit of the doubt.) If banks control the nation’s mortgage market, does anyone think they’ll be allowed to fail in the next crisis? In which case, how are they not government-supported entities, as well?

One legitimate complaint about the old Fannie and Freddie was the way they garnered political clout through their promotion of homeownership. In their heyday, it was immense and ugly. (“Fannie has this grandmotherly image, but they will castrate you, decapitate you, tie you up, and throw you in the Potomac,” a congressional source told the International Economy in the late 1990s. “They are absolutely ruthless.” That would pale next to the political clout of a big bank that also controlled the mortgage market, and whatever evils grew out of the GSEs’ need to please politicians, there could be worse. Imagine the conversation in a back room between the politicians and the bank executives, where they agree that if the bank will loosen up credit in their states, the politicians will go easy on, say, derivatives regulation. It almost makes the old Fannie and Freddie look pure.

Fannie and Freddie have legitimate problems. As Obama said, theirs was a flawed business model in which the drive for profits ultimately led to their failure. Many economists also argue that any subsidy eventually leads to corruption. But there are ways to mitigate these issues. Regulate Fannie and Freddie like utilities, with limits on the returns they can make. Create incentives that encourage them to pull back from the market when it’s overheating, instead of chasing market share. Give them as competent a regulator as possible. Encourage Fannie and Freddie to get private capital to bear risk ahead of them, which they are trying to do, and which is how their existing multi-family businesses operate.

None of this would satisfy the Fannie and Freddie bloodlust. Nor would it be perfect. But if perfect is out there somewhere, it’s time to propose it. We need a housing policy.

Correction: An earlier version of this story incorrectly stated that, according to Zillow, the relatively low increase in rent in Washington was due to rent control. It was, according to Zillow, due to an increase in housing supply.

Twitter: @bethanymac12

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