In this report, we assess the implications of the new Basel III liquidity-risk rules for the U.S. residential-mortgage market, looking at what they mean to covered banks and, if applied to them (as some day they will) to Fannie, Freddie and the FHLBs.  The new rules are complex, imposing stiff new short- and long-term finding requirements that, even though phased in and subject to change, will dramatically rewrite asset/liability management.  Ordinarily, this would mean a lot more interest in securitization, building on the Basel III capital incentives we discussed in our analysis of these rules last week. However, the liquidity rules are tougher on securitization than many anticipated, building on all the recent requirements (including pending risk-retention ones) to make this far from a straightforward way out of the new regulatory squeeze. Contingent mortgage commitments – most notably HELOCs – will also be lots tougher to book because, now, they will need a lot more up-front funding.

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