"If it wasn't for Fannie and Freddie, [the mortgage crisis] would have been a small problem. Fannie and Freddie and other government agencies guaranteed 70 percent of those [bad] mortgages," Kovacevich said in a " Squawk Box " interview. He argued that without government-sponsored guarantees, there would not have been any private money willing to buy the toxic loans that have been blamed for the crisis.
"There needs to be a decision that the government will not be in the mortgage business in the sense of a hybrid [like Fannie and Freddie]," Kovacevich said. He did say that if the government wants to be in the home loan business, it should do so through the Federal Housing Administration, which has worked well for a long time.
"Everything else has to be privatized," he said, adding that that can be achieved "by reducing by $100,000 a year the Fannie and Freddie guarantee."
"It's about $650,000 today and so in [about] five years from now they're out of the business," Kovacevich said.
Kovacevich lamented that Washington has been trying to rewrite the rules for mortgage lenders for four years and nothing has been done. "We're waiting for bureaucrats in Washington to tell us how to make mortgages? It doesn't make any sense," he said.
He added that it's Washington's fault that mortgage lending standards are so tough right now, because they haven't defined new rules.
Regulators would disagree with Kovacevich, saying mortgage companies were irresponsible in the lead-up to the mortgage crisis - lending money to people who couldn't really afford to buy homes - and the industry needs to be reigned in to help prevent this from happening again.
By CNBC's Matthew J. Belvedere; Follow him on Twitter @Matt_SquawkCNBC
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