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AllianceBernstein Issues White Paper Proposing Greater Role For Private Capital In The U.S. Mortgage Market

NEW YORK, Dec. 13, 2011 /PRNewswire/ -- The future role of the government in housing finance is a current subject of debate among legislators, policy makers, regulators and market participants.  All agree, however, that attracting private capital into the $10.4 trillion US mortgage market is integral to building a stable foundation to support the market's future growth.  A new white paper written by key members of AllianceBernstein's Structured Asset Portfolio Management and Research team, Matthew D. Bass and Michael S. Canter -- "Increasing the Role of Private Capital in the Mortgage Market" -- provides valuable insight into how to address this critical issue.

The purpose of the white paper is to advance the discussion regarding how to attract private capital into the mortgage market based on AllianceBernstein's perspective as an investor in mortgage assets.  Specifically, the paper details three key principles regarding the role of private capital in the mortgage market; provides two potential market-based solutions for private capital sharing credit risk with the government; and proposes a transition path.

First, government involvement in the mortgage market is necessary to ensure a stable, well-functioning market;

Second, because the private market is better positioned to price risk, 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;

Third, in order to provide a more stable foundation for the housing market going forward, private first loss capital should be unlevered and the first loss piece should not be credit tranched.

By way of highlighting solutions for private capital sharing credit risk, Bass and Canter suggest that to ease the transfer of risk to private capital the government can begin to move forward quickly without the need for new legislation by reintroducing transactions that enjoy successful precedents such as Freddie Mac's Mortgage Default Recourse Notes (MODERNs) and K-Series transactions. 

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