In this report, we assess the impact of key provisions in the House-passed financial-reform legislation for U.S. mortgage finance.  We know that the bill as a whole will not be enacted into law but key provisions in it are very much in play as evident in last night’s Treasury report.  We will turn shortly to an assessment of what Treasury wants and how it could get it with or without Congress, laying out her how the Hensarling bill defines the initial framework for legislation where new law is needed to accomplish these GOP goals.  For all the regulatory relief granted in the Hensarling Financial Choice Act, the bill’s 10% leverage ratio adds yet another significant capital disincentive for most banks to do anything but securitize all but the highest-risk mortgages (which the bill’s capital framework encourages them to have and to hold).  Combined with the end to risk retention also mandated by the bill, a new day could dawn for PLS, with GSE-reform advocates such as Hensarling perhaps hoping that these changes also permit return to a fully-private mortgage-finance system.  They don’t, but that’s another matter.

The full report is available to subscription clients. To find out how you can sign up for the service, click here.