There's only one way to fix the badly dilapidated housing market, and that's to fully nationalize mortgage giants Fannie Mae and Freddie Mac.That's the advice from bond king Bill Gross, who was among the executives asked to attend a Capitol Hill summit yesterday to hash out the fate of Fannie and Freddie, which were taken over by the government during the financial crisis.
Gross, who runs the world's largest bond fund, Pacific Investment Management Co. (Pimco), said keeping Fannie and Freddie as wards of the state may be the only permanent means of propping up the $11 trillion housing market.
"The only way to bring housing back and to create liquid, financeable mortgage finance going forward would be to provide a government guarantee," Gross said yesterday at the daylong summit.
Gross' comments at the summit were at odds with the views expressed by Treasury Secretary Tim Geithner, who said that Uncle Sam can't go back to the faulty model that left Fannie and Freddie choking on toxic mortgages two years ago, requiring a $150 billion taxpayer-funded rescue.
"The government's footprint in the housing market needs to be smaller than it is today," said Geithner, who co-hosted the summit. "We will not support returning Fannie and Freddie to the role they played before [the government took them over]." As it stands now, Fannie and Freddie, which are 80-percent owned by Uncle Sam, back about 80 percent of all US mortgages. One fear is that buyers of mortgage-backed securities won't purchase more mortgages if the government doesn't provide a guarantee.
Given that Fannie and Freddie guarantee such a massive chunk of the home mortgage market, Gross has recommended that the Obama administration push the two institutions to refinance millions of mortgages -- a move he says would inject as much as $60 billion into the collective wallets of homeowners and boost housing values by as much as 10 percent.
Gross' support for fully nationalizing the mortgage companies isn't novel. Some believe the Newport Beach, Calif.-based money manager's advice is in support of his firm, Pimco, which holds huge positions in mortgage debt.
"Nationalizing Fannie and Freddie may be a great trade for Pimco, but I think nationalizing the whole mortgage system is not a realistic option," said Jon Trugman, founder of New York-based hedge fund Pendulum Capital.
Yesterday, government officials and financial executives bandied about a raft of options for the beleaguered mortgage giants, including offering temporary guarantees on mortgage debt until the economy stabilizes.
Dismantling the entities in place of one gigantic mortgage co-op in which other mortgage lenders would own shares was also floated.
However, Geithner didn't appear to outline any specific game plan yesterday for dealing with Fannie and Freddie. Retooling the mortgage entities has been a nagging issue for the Obama administration and a problem that could cost taxpayers as much as $1 trillion, according to estimates.
"Here we are after passing the financial reform bill and we still can't have an honest conversation about [Fannie and Freddie]," said Christopher Whalen, managing director for Institutional Risk Analytics.
By MARK DeCAMBRE New York Post August 18, 2010
Bond king Gross says nationalize Fannie and Freddie - NYPOST.com
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