American housing finance is living in the wake of the great housing bubble of 2000-2006 and its collapse into the panic of 2007-2009. With house prices having fallen more than 30 percent from peak to trough--something previously considered impossible--they have now arrived back at their long-term trend line. That leaves them at the price levels of 2003, or seven years ago, and house prices currently seem to be tracing an extended bottom.

A memorable decade. How can we apply its lessons to the next decade?

Representatives and political supporters of Fannie Mae and Freddie Mac frequently used to say, "American housing finance is the envy of the world." It really wasn't, as discussions with housing finance colleagues from other countries always made clear. But many Americans thought it was, just as they mistakenly thought the United States had the highest homeownership rates in the world. We didn't.

What was remarkable and indeed unique in the world about American housing finance was the role played by Fannie and Freddie as government-sponsored enterprises (GSEs). Fannie and Freddie did--and now that they are officially wards of the state, do even more--play a dominant and disproportionate role. In the wake of the bubble, it is clear that this GSE-centric model should not survive. What should replace it? . . .

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Alex J. Pollock is a resident fellow at AEI.