In a recent in-depth report and post on our Economic Equality blog, we assessed the overall impact of the inter-agency proposal incorporating current expected credit loss (CECL) accounting into the regulatory-capital framework with a three-year transition period. Here, we go into more detail on what happens to residential mortgages if this proposal is finalized as is. The relationship between CECL and capital seems technical but will have far-reaching implications for the ability of banks of all sizes to engage in mortgage origination other than through government-backed securitization. Although all publicly-traded lenders and securitizers are also coming under CECL, their ability to adapt to higher reserves is greater since they do not also have to take on the capital double-whammy mandated by the banking regulators. That said, CECL should shift overall private-sector capacity to shorter-term, more highly collateralized residential loans backed by third-party credit enhancement where this is still to be had. Action on the GSE conservatorships would also have to be sooner than later.
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