The relationship between housing finance and the government has been a hotly debated topic from Wall Street to Main Street since the mortgage crisis began, and the recently released white paper from ""AllianceBernstein"":https://www.alliancebernstein.com/ABCOM/global_landing_page/index_page.htm?corp=true provides a critical look at the role of private capital in reducing the housing market's dependence on Capitol Hill. Written by the company's Structured Asset Portfolio Management and Research division, the document emphasizes the importance of tapping into private funds to develop a stable foundation for the mortgage sector.[IMAGE]
The white paper, which is titled ""Increasing the Role of Private Capital in the Mortgage Market,"":https://www.alliancebernstein.com/Research-Publications/White-Papers/Housing-Finance/Stories/6718-Housing-Finance.htm was created by Matthew D. Bass and Michael S. Canter, and through the insight provided by its researchers, AllianceBernstein hopes to advance the cause of attracting more private capital to the mortgage marketplace. The company's evaluation encompasses three specific aspects of facilitating investments in mortgage assets including the necessary position of the government in housing, as well as the solutions possible via greater private market involvement and the deleveraging first loss capital.
Within its white paper, AllianceBernstein clearly noted that ""government involvement in the mortgage market is necessary to ensure a stable, well-functioning market."" However, the company couched its statement carefully, going on to write, ""The private market is better positioned to price risk ├â┬ó├óÔÇÜ┬¼├é┬ª private investors should provide first-loss capital to the mortgage market to protect taxpayers from losses, while the government should provide catastrophic loss insurance to ensure stability in periods of market stress and to maintain the credit risk-free nature of agency MBS.""
Bass and Canter also commented on the length of time such a transition would take, and the document's creators stated that ""the greatest chance of success will depend on the development of multiple private-capital based options to provide the broadest and deepest investor base.""
Other key notations within the white paper included the call for first loss capital to be unlevered and for the credit tranches applied to be removed for the first loss piece. Additionally, Bass and Canter mentioned that there is ""secular demand for income producing assets like first loss mortgage risk from longer-term investors such as pension funds, sovereign wealth funds and insurers with longer-duration liabilities.""
Generally, the white paper focused on building quality in the housing finance sector in order to achieve long-term stability, as opposed to targeting quantity through initiatives like lower mortgage rates based on systemic leverage. In conclusion, Bass and Canter stated, ""The process of bringing private capital into the mortgage market will take time. If these changes are well communicated and the market is structured appropriately, we believe that there is a deep investor base that is ideally positioned to invest in first-loss mortgage risk over the long term.""