Mortgage Market Needs More Government, Not Less - Bill Gross

August 24, 2010 4:01 PM EDT
The housing market is in turmoil following the economic recession, a point made even more clear on Tuesday when it was reported that existing home sales dropped by the widest margin in July in 15 years.

Bill Gross, founder of the largest U.S. bond fund, Pimco, said that the government needs to do something with Fannie Mae and Freddie Mac to get the housing market back on its feet and start the flow of credit to homebuyers that need it.

Gross sees the involvement of the government in the housing market as a necessity, even if it is not desirable. He suggests rolling Fannie and Freddie, along with other housing agencies into one large agency to protect homeowners and open doors for those looking for a mortgage loan.

"Taxpayers would be protected through tight regulation, adequate down payments, and an insurance fund bolstered by a 50–75 basis point fee attached to each and every mortgage," Gross wrote. "Seemed commonsensical to me. After all, Fannie and Freddie had really blown up because of the private/public nature of their charter, which incentivized executives and stockholders to go for broke with the implicit understanding that Uncle Sam would be there as a backstop should anything go wrong."

Gross sees the elimination of the private market as a way to eliminate "liar loans" and it would create a stronger foundation for homeowners and investors.

Gross noted that 95 percent of existing mortgage creation in the last 12 months was backed by government guarantees, and that the private origination and securitization has made it a necessity for the government to get involved.

"Americans now know that housing prices don’t always go up, and that they can in fact go down by 30–50% in a few short years. Because of this experience, private mortgage lenders will demand extraordinary down payments, impeccable credit histories, and significantly higher yields than what markets grew used to over the past several decades."

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Existing-Home Sales, William H. Gross, Pacific Investment Management Company, LLC (PIMCO)

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