If government support of the mortgage market is reduced – either gradually or immediately – and the private sector doesn't fill the void with investment capital, it could have dire consequences for housing and residential finance, according to a new analysis released by Redwood Trust.

The publicly traded REIT – the only company to issue a Jumbo security in almost two years – believes that if private investors do not step up to the plate, mortgage rates will rise, home prices will fall or stagnate, and some borrowers won't be able to get a loan.

Over the years these 'private' investors, which include pension funds, insurance companies, and mutual funds, have been buyers of triple-A rated MBS.

But according to a new white paper posted on the REIT's Web site, these triple-A investors are "angry about how many of their investments performed during the recent financial crisis and recession."

The company adds that, "More recently these same investors have been enduring the fiasco surrounding foreclosure processes and the questions regarding the adequacy of mortgage documentation."

Redwood believes private investors will return to the market but only if several changes are made to how business is conducted, including the establishment of new standards for trustee conduct, and best practices standards for reps and warranties, and more.

The Mill Valley, Calif., based MBS investor, which plans to issue another Jumbo security early next year, has talked to regulators about its concerns and has met with Treasury officials.

Some incoming members of the new Congress, including many freshman Republicans, have designs on legislating Fannie Mae and Freddie Mac out of existence, and replacing their role through the use of covered bonds.

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