Gross urges ‘nationalization’ of housing finance

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. LLC, told a gathering of mortgage industry leaders last week that the United States should consider “full nationalization” of the mortgage finance system.

“To suggest that there’s a large place for private financing in the future of housing finance is un-realistic,” he said last week at a conference in Washington convened by the Treasury Department. “Government is part of our future.”

“We need a government balance sheet,” said Mr. Gross, Pimco’s managing director and co-chief investment officer. “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 Mr. 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.

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

“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,” he said at the conference.

There is “no clear consensus” on how to design a new system, Mr. Geithner said.

“The government’s footprint in the housing market needs to be smaller than it is today,” Mr. Donovan said at the conference, adding that Fannie Mae, Freddie Mac and the Federal Housing Administration guarantee more than 90% 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 and Freddie Mac have been sustained by almost $150 billion in Treasury aid since September 2008, when they were seized by the government amid soaring losses on mortgage investments. The United States has promised unlimited support for the two companies.

“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,” Mr. Geithner said.

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 won’t back away from the companies’ obligations, Mr. -Geithner said.

“We need to make it absolutely clear that we will make sure the [government-sponsored enterprises] 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,” he said.

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

“Fixing this system is one of the most consequential and complicated economic-policy problems we face as a country,” he said.

“The stakes are high. The housing industry supports millions of jobs,” Mr. Geithner said. “For many Americans, their home is their largest financial asset.”

The U.S. homeownership rate fell to 66.9% in the second quarter, the lowest level since 1999 and down from a peak of 69.2% in 2004, according to the Commerce Department.

Related Topics: Pacific Investment Management Company (Pimco)