Gross Says Mortgage Yields Would Soar Without Government Aid
Co-Chief Investment Officer of PIMCO Bill Gross
Andrew Harrer/Bloomberg
Bill Gross, co-chief investment officer of Pacific Investment Management Co., PIMCO.
Bill Gross, co-chief investment officer of Pacific Investment Management Co., PIMCO. Photographer: Andrew Harrer/Bloomberg
Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said mortgage yields in the U.S. could rise as much as 4 percentage points without government support.
“Ninety-five percent of existing mortgage creation over the past 12 months were government guaranteed,” Gross wrote in a monthly investment outlook posted on Pimco’s website today. “The private market was nowhere to be found because they charged too much.”
Gross said he proposed last week that the government maintain a role, combining U.S.-run companies Fannie Mae, Freddie Mac and federal housing agencies into one entity that would guarantee “a majority of existing and future originations.”
“Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending,” Gross wrote. “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 the “cost would be enormous in terms of yields,” which could rise 300 basis points to 400 basis points, “crippling any hopes of a housing-led revival to the economy.”
Fannie Mae Yields
Yields on Washington-based Fannie Mae’s 30-year fixed-rate current-coupon securities, those that most affect loan rates because they’re trading closest to face value, fell to 3.42 percent today, from this year’s high of 4.67 percent on April 5, Bloomberg data show.
“As the Treasury contemplates the ‘transition’ from Agency conservatorship to either public or private hands, how could private market advocates reasonably assume that pension, insurance, bank and PIMCO-type monies would willingly add nearly $5 trillion of non-guaranteed, in many cases junk-rated mortgages to their portfolio?” Gross wrote.
Gross increased the $239.3 billion Total Return Fund’s holdings of mortgage debt to 18 percent in July from 16 percent the month before, the most since September, according to Pimco’s website.
The average rate on a typical 30-year fixed mortgage is 4.53 percent today, according to North Palm Beach, Florida-based Bankrate.com.
Home Sales
Sales of existing homes in the U.S. dropped 27.2 percent in July after a revised 7.1 percent decline in the previous month, the National Association of Realtors reported today. The median forecast of 74 economists in a Bloomberg News survey was for a 13.4 percent drop.
“Americans now know that housing prices don’t always go up and that they can in fact go down by 30 to 50 percent in a few short years,” Gross wrote. “It was the cost of private origination and securitization, perhaps more than any other factor, that justified government involvement.”
Gross said on Aug. 17 that U.S. policy makers won’t agree to sponsor broad-scale refinancing of residential mortgage debt at current interest rates to boost the economy.
Speaking in Washington as part of a Treasury Department conference on ways to overhaul the housing finance system, Gross urged officials then to use government-controlled vehicles including Fannie Mae and Freddie Mac to help homeowners cut mortgage payments. He told reporters the idea doesn’t “have a ghost of a chance.”
The Total Return Fund returned 12.96 percent in the past year, beating 69 percent of its peers, according to data compiled by Bloomberg. Its one-month return is 1.93 percent, leading 85 percent of competitors. Pimco is a unit of Munich- based insurer Allianz SE.
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net
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