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Tuesday, August 17, 2010

Pimco’s Gross Urges ‘Full Nationalization’ of Housing Finance

Bloomberg / Business Week

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the U.S. should consider “full nationalization” of the mortgage- finance system as the Obama administration plots the revival of a market that was at the center of the 2008 credit crisis.

“To suggest that there’s a large place for private financing in the future of housing finance is unrealistic,” Gross said today at a U.S. Treasury Department conference in Washington. “Government is part of our future. We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.”

Treasury Secretary Timothy F. Geithner and Housing and Urban Development Secretary Shaun Donovan gathered housing- industry stakeholders to seek advice as the administration prepares a housing-finance overhaul to be delivered in January. The position taken by Gross, whose firm is among the biggest holders of U.S.-backed mortgage debt, is at odds with industry and government officials who have urged a smaller federal role.

Geithner said the government must reduce its role in housing markets and ensure Fannie Mae and Freddie Mac, the mortgage-finance companies operating under U.S. conservatorship, won’t require future bailouts.

“We will not support returning Fannie and Freddie to the role they played before conservatorship, where they took market share from private competitors while enjoying the perception of government support,” Geithner said today at the conference.

There’s “no clear consensus” on how to design a new system, he said.

Financial Regulation

“The government’s footprint in the housing market needs to be smaller than it is today,” Donovan said at the conference, adding that Fannie Mae, Freddie Mac and the Federal Housing Administration guarantee more than 90 percent of all mortgage loans. “We need to work to foster a strong but healthy market for private capital to harness the vitality, innovation and creativity in our system in a responsible way.”

Fannie Mae, based in Washington, and Freddie Mac of McLean, Virginia, have been sustained by almost $150 in Treasury aid since September 2008 when they were seized by the government amid soaring losses on mortgage investments. The U.S. has promised unlimited support for the two companies.

‘Smaller’ Role

“We need to begin the process of weaning the markets away from government programs and make room for the private sector to get back into the business of providing mortgages,” Geithner said. “We need to continue working to keep overall mortgage rates reasonably priced.”

The Treasury chief also said that plans to reduce the portfolios of Fannie Mae and Freddie Mac should proceed “in a careful way.” The government wouldn’t back away from the companies’ current obligations, Geithner said.

“We need to make it absolutely clear that we will make sure the GSEs have the resources to meet their financial commitments,” he said.

An explicit government guarantee against catastrophic losses could help attract private capital to the housing-finance system, said Mike Heid, co-president of Wells Fargo Home Mortgage.

The major policy challenge will be “how to marry this government guarantee with the maximum use of private capital in a way that minimizes the risk to the taxpayer, encourages competition, and ensures no one institution is too big to fail,” Heid said.

Geithner said the administration “will not support” a system that relies on taxpayer funds to backstop the gains of private shareholders.

“Fixing this system is one of the most consequential and complicated economic policy problems we face as a country,” he said. “This is a test for Washington. The stakes are high. The housing industry supports millions of jobs. For many Americans, their home is their largest financial asset.”

U.S. home ownership rate fell to 66.9 percent in the second quarter, the lowest level since 1999 and down from a peak of 69.2 percent in 2004, according to Commerce Department figures.