The well-intentioned white paper on potential solutions for the depressed housing economy will ultimately shrink capital invested in the market, according to early reaction letters, but it also includes many upsides.

Sources in mortgage finance appreciate the input from the Federal Reserve and largely support efforts to clear the backlog of real-estate owned properties on the books at Fannie Mae and Freddie Mac.

While it is no surprise that recommendations championed by Fed Chairman Ben Bernanke would be crafted to support the housing desires of the current administration, they say the ideas will ultimately restrict access to mortgage finance capital and suck liquidity out of the market.

For example, massive refinancings add a layer of political risk to higher coupon mortgage-backed securities investors,” according to Steven Abrahams, structured finance analyst at Deutsche Bank (DB).

“The Fed’s endorsement of programs to clear REO from housing markets should put a bullish tone in mortgage credit fundamentals,” Abrahams said. “The waning liquidity of nonagency MBS, of course, works in the other direction. Well-vetted credit held long enough (will) probably pay off handsomely.”

More critical of the white paper, Chris Low, chief economist of FTN Financial warned that there are few willing investors for the REO the federal government holds, in one way or another. Exposure to the single-family market is already markedly high, he points out, leaving few buyers of cheap homes or mortgages. If there is a Fed program, demand for REOs likely will run out before it is completed.

“The market desperately needs sources of capital, not more rules and ideas for existing ones,” Low writes. “The new round of housing policy adventures recommended by the Fed depresses interest in the vital $10 trillion U.S. mortgage market. It is going to continue to shrink.”

Write to Jacob Gaffney.

Follow him on Twitter @jacobgaffney.

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