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Pimco's Gross: Mortgage market needs more U.S. help, not less

August 17, 2010 | 10:33 pm

As an invitee to the government’s conference Tuesday on the future of housing finance, Pimco bond guru Bill Gross wasn’t shy about calling for more federal action -- not less -- to back up the mortgage market.

Gross told Treasury Secretary Timothy Geithner and others at the Washington meeting that it was, in effect, absurd to think that private investors like Pimco would be willing to own mortgages at current interest rates without the kind of government guarantees provided via Fannie Mae, Freddie Mac and Ginnie Mae.

From Reuters:

"Without a government guarantee, mortgage rates would be hundreds -- hundreds -- of basis points higher, resulting in a moribund housing market for years," Gross said.

He said Pimco would not consider investing in a private, or privately insured, mortgage pool unless it was accompanied by 30% down payments -- far above the current norm.

Newport Beach-based Pimco owns plenty of Fannie, Freddie and Ginnie mortgage bonds, so Gross knows that everybody else knows he has a vested interest in keeping Uncle Sam’s guarantee of repayment on those securities and on newly issued ones.

Billgrossside But he then went further at the conference, calling for the Obama administration to endorse a major refinancing plan that would slash mortgage rates for millions of Americans to current record-low levels. The government would absorb the risk entailed in giving new loans to homeowners who otherwise might not qualify for refis.

Rumors of such a program -- a way to put more money in consumers’ pockets and boost the economy -- have been bouncing around the online world for the last few weeks. Critics have bashed the concept (see here and here), which obviously runs counter to the idea of having the government reduce its role in housing finance.

But Gross pressed on, saying that “policymakers should quickly re-engineer a refinancing opportunity for all mortgagees that are current on payments and are included in GSE-securitized mortgages," meaning those backed by the government-sponsored enterprises of Fannie, Freddie and Ginnie.

From the Wall Street Journal’s real estate blog Tuesday:

Massive refinancing of the nearly 60% of mortgages backed by the government that are one full percentage point above today’s 4.5% mortgage rates would provide quick stimulus “as well as a potential lift of 5-10% in terms of housing prices,” Gross said.

But after the conference Gross changed his tone, telling reporters that, realistically, the idea “didn’t have a ghost of a chance” and that he “actually shouldn’t have brought it up.”

If such a major U.S.-backed refi program were instituted, however, Gross noted that he and other bondholders would be hurt because their current mortgage bonds paying higher yields would be paid off and replaced by bonds paying less.

“The only communities that would suffer would be Wall Street,” he said. “We would lose and our clients would lose,” but “it’s about time we did something to benefit Main Street.”

-- Tom Petruno

Photo: Pimco's Bill Gross. Credit: Bloomberg News

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