Regulators and financiers could be focused on the wrong mortgage market. They are right that healthy American home lending hinges on the private sector’s ability to finance all or most of it, rather than relying on government-run Fannie Mae and Freddie Mac or their equivalents. But architects of the postcrisis home loan market may be assuming it needs to be larger than it really does. It could be scarcely half as big as the current $10.5 trillion and therefore much easier to finance.

Size matters because important constituencies are sweating the details of mandated reforms, including setting a new gold standard for mortgages. Making home lending less risky and housing boom-and-bust cycles less severe would probably reduce the supply of loans. If authorities and investors choose the wrong market size, they could strike the wrong balance.

Outstanding mortgages are still only 6 percent below the precrisis peak, while home prices are down a third. That’s one hint the market hasn’t bled out the excesses. Once foreclosures, sharply lower home values and the swelling ranks of renters are baked in, the market should shrink. Today’s mortgage market is more than twice as big as in less-frothy 2000. If home prices had appreciated in lock step with inflation since 1996 and loan-to-value ratios stayed the same, there would now be roughly $5.3 trillion in outstanding home loans, just over half the current level.

Or consider a simple calculation starting with the latest figures. First, assume that 4.3 million dud loans, as estimated by Barclays Capital, are repaid or written off once the relevant homes are foreclosed and resold. That could lop nearly $1 trillion from the market. Then, suppose the home ownership rate drops a couple more percentage points to the 64.5 percent average over the three decades leading up to 1999. That could knock off nearly $300 billion more. Overlay the drop in home prices from the 2006 peak, and a fully deleveraged mortgage market might be around $6.6 trillion in size.

Downsizing baby boomers also should translate to smaller mortgages. The whole market may not quite be cut in half. But policy makers shouldn’t ignore the possibility.

Default Fantasies

Fitch Ratings is the latest credit watchdog to warn about the consequences of a missed interest payment by the United States. Yet there’s a faction in Washington that seems increasingly inclined to push the nation’s debt fight that far.

There’s a false choice on offer, however. Republicans who say they’re willing to risk a brief, technical default by the federal government mostly think any earlier deal to raise the statutory debt cap would encourage further tax-and-spend profligacy by Democrats. They reckon a temporary default would be worthwhile to reach a long-term deal on spiraling health care and retirement obligations.

Action to reduce federal deficits is needed or one day the government really will run out of money. But the struggle in Washington to coalesce on anything suggests another half-baked and temporary budget agreement is the most likely result of the current fight. And if a technical default followed, it could be far worse than gung-ho Republicans imagine. Peru got away, more or less, with a missed payment in 2000, but had a clear rationale and was a known risky and peripheral debtor. America, by contrast, is the world’s credit benchmark and issuer of its reserve currency, suggesting a scarier outcome.

The credit rating and borrowing cost impact could be severe. But Fitch also points to repo markets — crucial plumbing for the global financial system — where an estimated $4 trillion of United States Treasuries are used as collateral. There are implications for the stability of money market funds, too.

Trouble in either place would echo the 2008 crisis. JPMorgan analysts further note the 40 percent decline in foreign holdings of the debt of government-sponsored housing enterprises in the year after they were bailed out, despite federal backing of their credit.

Even if a technical default wasn’t disastrous in the short term, it would damage trust in American debt and the dollar for the long term. The markets, which have turned perhaps too benign an eye so far, could start delivering a harsher verdict sooner than the putative August debt cap deadline. Reaching that date doesn’t mean Uncle Sam will inevitably miss a payment. But a loss of confidence would not be easily reversed.

AGNES T. CRANE and RICHARD BEALES

For more independent financial commentary and analysis, visit www.breakingviews.com.

PHOTO: A foreclosure in California. The housing market is still suffering from excesses. (PHOTOGRAPH BY JUSTIN SULLIVAN/GETTY IMAGES)

Late Edition – Final

By AGNES T. CRANE and RICHARD BEALES