4 Ways to Repeat the Mortgage Mess: Peter Wallison

He points to other federal insurance systems that have gone or are going broke, including the Federal Housing Administration, the Pension Benefit Guaranty Corp. and the Federal Savings and Loan Insurance Corp.

"To stave off insolvency, the Federal Deposit Insurance Corp. in 2009 ordered banks to pay three years of insurance premiums in advance," he said.

Congress lacks the incentives of private insurers to charge risk-based rates or to create and maintain the large funds necessary to deal with catastrophic losses, Wallison writes. There is always an incentive to keep rates down to placate interest groups, or to say the fund is large enough—until disaster strikes and the country learns it isn't. Third, federal insurance encourages careless behavior by those who know that if things go bad, someone will be there with a bailout.

"Consider the Bipartisan Policy Commission's plan, 'Housing America's Future.' The government's role would be to backstop a private system of mortgage insurance. The backstop will only come into play if private insurers can't meet their obligations."

The downside? Investors in mortgages or mortgage-backed securities created under the plan would have little incentive to care about the quality of the loans—precisely because they would ultimately be protected from losses by the government, he says.

Fourth, he says, Congress will do what it always does—expand the program so that it covers more and more mortgages of lower and lower quality.

"Since Fannie and Freddie were bailed out, there has been no end of plans to maintain the government's role as guarantor of mortgages for housing and other real estate," Wallison concludes. "They will all end up putting the country back on the road to another crisis. The only way to ensure a stable mortgage market is to get the government out, and keep it out."

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