The fine balance between proliferation, differentiation, and apoptosis in the colonic epithelium is tightly controlled by the interplay between WNT, Notch, and bone morphogenetic protein (BMP) signaling. How these complex networks coordinate the colonic homeostasis, especially if cancer predisposing mutations such as mutations in the DNA mismatch repair (MMR) are present, is unclear. Inactivation of the MMR system has long been linked to colorectal cancer; however, little is known about its role in the regulation of the colonic homeostasis. It has been shown that loss of MMR promotes the proliferation of colon epithelial cells that renders them highly susceptible to transformation. The mechanism through which MMR mediates this effect, yet, remains to be determined. Using an MMR-deficient mouse model, we show that increased methylation of Dickkopf1 impacts its expression, and consequently, the ability to negatively regulate WNT signaling. As a result, excessive levels of active β-catenin promote strong crypt progenitor-like phenotype and abnormal proliferation. Under these settings, the development and function of the goblet cells are affected. MMR-deficient mice have fewer goblet cells with enlarged mucin-loaded vesicles. We further show that MMR inactivation impacts the WNT–BMP signaling crosstalk.