GSE Reform: Diversification is Critical in Sizing the Capital Requirement in the New Regime

Brief

GSE Reform: Diversification is Critical in Sizing the Capital Requirement in the New Regime

January 15, 2014

Abstract

The GSE Reform Debate has thus far succeeded in building a broad (though not universal) consensus that Freddie and Fannie should be replaced by a system in which private capital bears the first loss, with a catastrophic government guarantee behind it taking the residual risk. Investors would continue to have access to mortgage backed securities with a full faith and credit guarantee, but, in contrast to the current situation, the bulk of the credit support would come from private capital. The Corker-Warner proposal, S. 1217, for example, has this structure.

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