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Reducing Taxpayer Exposure: Sharing Credit Risk with the Private Sector

In a housing finance system that includes a government guarantee, private capital that stands in the “first loss” position plays an important role in reducing the risk of taxpayer losses. “First loss” means the private sector stands ahead of the government in guaranteeing the timely payment of principal and interest on mortgage-backed securities (MBS) when borrowers default. On top of providing an important buffer, the presence of private capital brings to the table a third party that is motivated to ensure the loans backing the MBS are properly underwritten, originated, and serviced to minimize losses.


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