The GSE Reform Debate: How Much Capital Is Enough?

Research Report

The GSE Reform Debate: How Much Capital Is Enough?

October 24, 2013

Abstract

Over the past eight months, a broad consensus has been emerging on the future of housing finance. Under several plans, private-sector entities would continue to originate and service mortgages, with other private-sector entities providing credit enhancement for mortgage-backed securities. A public entity would be the guarantor of last resort, absorbing catastrophic risk. Collateral composition, house price experience, and diversification significantly affect credit risk, and thus the capital requirements. If capital requirements are too low, the government guarantee will be invoked too often; if they are too high, banks will shift the ultimate risk of their lower-quality loans to the government.

Centers

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