GSE 3.0
Late last week, the Federal Reserve Bank of New York released a working paper that, while unofficial, bears the central bank’s imprimatur on a very detailed alternative model for new-style GSEs. The FRB-NY addresses several major issues in Corker-Warner – e.g., the depth of first-loss coverage from RMBS issuers and the fate of TBA – creating a carefully-structured mutualized utility that would be backed by USG catastrophic coverage tied to each vintage of loans, not to the issuer. It also addresses systemic-liquidity concerns, providing what we think will prove a more resilient way to keep mortgages from coming under acute stress while protecting taxpayers better than the FHA emergency role in the Hensarling bill. However, the model is premised on securitization only of conventional, conforming loans with LTVs below 80%, essentially leaving HLTV mortgages to the FHA and otherwise ducking the affordable-housing question. We think the capital estimates for the utility ahead of the USG are too low, but even with higher capital, we think the FRB-NY’s approach could work if lender/investors in it accepted lower ROE to achieve liquidity and keep the secondary-market’s lights on.

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