Recent large outflows from thrift institutions and concurrent sharp declines in residential housing starts have intensif1ed the search for eff1cient ways of protecting both the solvency of thrift institutions and the flow of funds into the mortgage market. In its report, the President's Commission on Financial Structure and Regulation (the Hunt Commission) recommended, among other things, that thrift institutions be permitted to offer variable rate mortgages (VRMs) and be provided with insurance against increases in interest rates.l At first glance, these two recommendations appear redundant. Both VRMs and the insurance are designed to protect thrift institutions from experiencing losses on their mortgage loans attributed to unfavorable interest rate movements after the mortgage is made. It follows that if they sell VRMs, thrift institutions would not need interest rate insurance, and if they had interest rate insurance, they would not need to sell VRMs. However,with only small modification, the effectiveness of these proposals can be increased greatly. The most effective solution to the dual thrift-institution-mortgage-market problem is to provide thrift institutions with the benefits of VRMs and mortgagors with the benefits of fWlxed rate mortgages (FRMs). This can be achieved either by having thrift institutions offer VEMs and providing interest rate insurance to mortgagors or by having thrift institutions offer FRMs and providing interest rate insurance to them. Ithis paper develops the rationale for these alternative proposals by providing new insights into the operation of thrift institutions. In addition, it is argued that because the Federal government is the single most important determinant of interest rates, the mortgage rate insurance can be provided efficiently only by the government. It is generally argued that because thrift institutions borrow short and lend long they experience difficulties in periods of rising interest rates and, in particular, in periods when short-term rates rise relative to longer-term rates. As a result, in these periods they are forced to pay higher rates on their deposits but can earn higher rates only on their new mortgages, which are a small proportion of their overall mortgage portfolio. Thus, they experience reductions in their profits and possibly even losses. Unfortunately, this analysis is only partially correct, and the proposals that follow from it only partially helpful. Similar to all other financial intermediaries, thrift institutions engage in denomi-