As we have noted in prior reports, any successors to Fannie Mae and Freddie Mac with any hope of mobilizing private-sector capital for mortgage finance need to do so with eyes wide open as to the regulatory and business-model constraints governing the globe’s biggest banks.  Although a new paper from the Milken Institute Center for Financial Markets and OECD looks at development finance – not mortgages – its findings are directly germane to how guarantees must be structured if a new agency hoping for private-capital participation has any hope of sustaining a $10 trillion housing market.  Although the study does not address complex structuring questions such as credit-risk transfers, its findings nonetheless make it clear that the global financial market will support large volumes of U.S. housing finance only if backstop guarantees are unconditional, claim-payment certain, and otherwise advantageous under applicable capital and liquidity rules under CECL-accounting conditions.  Making this happen with a governmental or quasi-governmental guarantor is hard enough, as this paper demonstrates; doing it only with private capital is impossible.

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