Annaly Capital Management (NLY) CEO Michael Farrell, who runs two of the largest real estate investment trusts in the U.S., believes unwinding the government's role in the mortgage market is a step in the right direction, but the private-label market isn't ready to take the torch. Farrell testified before a House subcommittee hearing Wednesday on whether or not government barriers are keeping the housing market from a recovery. Annaly has been on the move in recent months, busily selling stock and taking the proceeds to the market, and purchasing MBS. The latest was an offering of 75 million shares Tuesday. Since July, Annaly has raised more than $2.4 billion to purchase MBS, not including the latest move. Farrell said that while securitization continues to attract large amounts of private dollars, most of it is going to securities with a government guarantee, either through Fannie Mae, Freddie Mac or Ginnie Mae. "This is to be expected, as this market always gains market share in counter?cyclical fashion," Farrell said. "The problem is that the credit?sensitive, non?Agency sector of the market, or the so?called private?label market, is dormant, with only one small deal done in the last two and a half years." He referred to the $237.8 million jumbo RMBS deal completed by Redwood Trust (RWT) in April 2010. But Redwood completed another $290 million deal Tuesday. Still, Farrell said the private-label market cannot restart because the current "economics don't work." "In order for the math to work, either primary mortgage rates have to rise, the rating agencies’ senior/subordinate splits have to come down, and/or return requirements by the secondary market have to decline," Farrell said. "And yes, for good or for ill, the private?label market is still critically dependent on the rating agencies as the arbiter of credit quality." Farrell added that investors are going after higher yields on legacy private-label MBS and seasoned mortgages that the market repriced after the financial crisis. As long as there is this value disparity between legacy and new securitizations, the private market will be slow to return. Farrell also pointed to the uncertainty of future regulations, namely the Treasury Department's proposal to wind down Fannie and Freddie and whether or not the conforming loan limits at these two firms will be lowered is still unclear. But he also said with underwriting standards so tight, there will not be enough demand to produce enough loans to securitize. "Can the private label MBS market come back to fill the credit gap that is currently filled by the GSEs? The short answer is: Yes it can, but not at the same price and not in the same size," Farrell said. "Securitization is the source of 75% of the capital to the housing market, and the private label securitization market isn’t working right now." Write to Jon Prior. Follow him on Twitter: @JonAPrior The author holds no relevant investments.