Panel
Housing Finance and Private Capital
- Reform principles were committed to presentation by the administration in 2013, though a common framework is anticipated to require months to finalize details.
- Legislation to address the housing market is expected to be delayed by Congress for two, three, or potentially four years, with the current conservatorship period lasting significantly longer than previously forecasted.
- Financial projections indicate a 10% or 5% first-loss provision should suffice over a 1,500-year horizon, with mortgage insurance fees eventually reaching a 2.5% ratio.
- Future risk transfer to the private sector via first-loss capital models is projected to evolve in stair steps over five to seven years, with a catastrophic reinsurer role targeted at 30% of the market rather than the current 80%.
- Market structure predictions suggest small bank aggregators will face shifting economics, potentially relegating them to holding mortgages or acting as third-party originators, while big banks are expected to see natural outgrowths in origination size.
- If no legislation is passed within the next two to three years, the majority of risk is predicted to shift to the private sector through securitization tools like STACR, contingent on the evolution of the multifamily market.
- Policymakers anticipate that new regulations will grant the government counter-cyclical flexibility to avoid funding constraints like TARP and allow for innovation through security-based guarantees rather than entity-based ones.
- Risks include the potential politicization of presidential intervention, the "stair step" nature of capital evolution requiring more expensive capital five, seven, or ten years out if requirements are waived, and the possibility of first-loss provisions being waived or rendered phantom during crises.
- Structural challenges involve the backward nature of mortgage system plumbing requiring work on servicing and data standards, alongside the expectation that small banks and smart money may price risk too high to provide effective first-loss capital.
- Market dynamics predict that introducing more players may increase concentration rather than competition, and Wall Street investors may pull back during weakness, increasing system procyclicality.
- Legislative progress is expected to hinge on a commitment to affordability, with a forecast that the status quo will result in no $50 billion in savings over the next decade.