For most of its history, private label securitization (PLS) has served as a valuable part of the housing finance market. It helped expand access to credit for many qualified Americans, who did not meet the underwriting criteria or conforming loan limits of Fannie Mae or Freddie Mac or qualify for Federal Housing Administration (FHA) insurance. However, the 2008 financial crisis exposed huge structural deficiencies in PLS that led to tremendous losses and severely damaged the trust of market participants. The pre-crisis PLS market was rife with conflicts of interest, inadequate investor protections, overreliance on credit ratings, contractual enforcement failures and a lack of transparency. We therefore believe that, while the PLS market can provide a channel for mortgage financing that is responsible and not reliant on a taxpayer-backed guarantee, its return must happen in a reformed and sustainable way. A reformed PLS market complements the Administration’s efforts to support the housing recovery on numerous fronts by improving access to credit and helping homeowners. While we do not see the PLS channel as a total panacea, it is one of a number of channels that can responsibly improve access to credit and strengthen the housing recovery.
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