This bundling of mortgages, and separating them into derivatives and packaging them in a way in which the actual degree of risk is unknown seems to be the cause of the current mess. Why should this not be regulated?
The risk is not "unknown". The problem actually stems more from the other financial instruments, such as credit default swaps, where the banks are insuring each other for defaults. The defaults went up more than anticipated, which caused a liquidity crisis. Long term, we're stable - it just that banks are short on liquid assets right now, so they're pulling back on credit to horde reserves. That's the part that affecting the rest of the system. There will be some pain as banks are forced to merge or buy each other out, but in a while all the losses will be ironed out, and we'll be on the way up again in the markets.
Actually, pooling mortgages as Fannie and Freddie do really reduces risk. You are able to minimize the risk to the bank by bundling up mortgages and spreading out the results of any defaults. Because of fraud (some of it Fannie, some of it at other banks) the risk was calculated to be less than it actually was, so some banks did not have enough reserves. You cannot regulate fraud.