A new report from Credit Suisse says that a "private-only" solution to the mortgage market will be "extremely challenging" and could remove up to $4 trillion in capital because risk adverse investors would flee if no government backstop is provided to MBS.
CS analyst Moshe Orenbuch and his team write banks will not step up to the plate to fill the mortgage investing void. "At an estimated 20% - 30% of bank balance sheets, it is difficult to envision banks providing enough capital to plug this gap even over the long term," they write.
The investment banking firm said it believes in its mantra of "keep what works and fix what's broken," adding that a "wholesale importation of a foreign housing model is not the answer, in our view. Most foreign systems serve housing markets that are a fraction of the U.S., and depend overwhelmingly on bank balance sheets, and floating-rate only mortgages."
CS said it favors "a well capitalized (85bp base plus 85bp countercyclical capital) GSE with GSE paid government catastrophic reinsurance is the most practical and sustainable housing finance model." (Bp stands for basis points.)
Many market participants and academics express the need for an explicit reinsurance for MBS, but differ on implementation.
"We believe that the government's involvement in providing catastrophic reinsurance is not a subsidy," the firm writes. "It simply ensures fair market pricing and continued availability of housing credit under adverse market conditions.)
