The private market could struggle to meaningfully absorb the capacity GSEs currently provide to the U.S. housing market, said Fitch Ratings in a report today on the housing finance reform proposal.

"U.S. banks may struggle to provide significant financing capacity, given both the likely persistence of 30-year fixed rate mortgages, which pose interest rate risk management challenges, and the leverage ratio, which limits balance sheet growth," analysts wrote. "Additionally, during times of stress, bank funding costs are likely to escalate, as evidenced by the ramp-up in credit default swap spreads for U.S. banks during the financial crisis"

Two private sector alternatives for financing of mortgages include covered bonds and private label MBS. According to Fitch, covered bonds might satisfy roughly 10% of current GSE financing volumes.

Private label MBS,on the other hand, is a big enough market with $1.3 trillion outstanding. However, analysts said it is still uncertain how much of the $4.4 trillion funding in MBS capacity now provided by the GSEs can be absorbed by a revitalized private label MBS market.

"A shift toward greater privatization, as proposed in the administration plan, depends both on attracting sufficient private sector capital to offset a reduction in government support and on achieving a sustainable equilibrium in the cost and availability of mortgage credit, particularly during periods of market distress," the Fitch report said.

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