Pimco Warns FHFA’s Fannie-Freddie Plan Threatens Housing Finance (You Ain’t Seen Nothing Yet!)

This may be one of the most ridiculous letters I have ever seen.

Pimco warns FHFA’s Fannie-Freddie plan threatens housing finance. Bond investors want Congress to pass legislation providing explicit U.S. guarantee of the companies’ mortgage securities.

(Bloomberg) — Pacific Investment Management Co., one of the world’s biggest bond investors, is warning that a regulator’s push to end federal control of Fannie Mae and Freddie Mac could threaten the U.S. housing finance system by forcing the sale of mortgage bonds and boosting loan interest rates.

Pimco executives, in a letter to the Federal Housing Finance Agency, expressed concern that Fannie and Freddie will be freed without congressional legislation, which they said investors would interpret as an abandonment of the government’s guarantee of the companies’ mortgage-backed securities. That would limit some investors’ ability to hold the bonds and force others to drop the securities altogether, the executives wrote in the letter dated Monday.

“Mortgage rates will increase, homeownership will likely suffer and the national mortgage rate will no longer exist,” the executives wrote.

Pimco’s warning came in a comment letter responding to an FHFA proposal that would require Fannie and Freddie to hold hundreds of billions of dollars in capital. The plan, released by the regulator in May, is considered crucial to ending the companies’ conservatorship because FHFA Director Mark Calabria has said it would allow them to absorb losses outside the government’s grip. Calabria has said he plans to release the companies from U.S. control and that they could try to raise money from investors as soon as next year.

Fannie and Freddie don’t make mortgages, but buy them from lenders, wrap them into securities and guarantee to bond investors the repayment of principal and interest. Together, they back nearly half of the $10 trillion mortgage market.

First of all, the implicit guarantee from Treasury kicked in when Fannie Mae and Freddie Mac were placed into conservatorship by FHFA. So demanding an EXPLICIT guarantee is nonsense when the Federal government is inclined to bail out systemically important financial institutions (SIFIs).

Second, The Fed has the housing market’s back. Look at Case-Shiller HPIs for Los Angeles and San Francisco since The Fed’s entrance in late 2008.

Third, would mortgage rates really rise if Fannie and Freddie are privatized? Probably, but The Fed can control that spread.

Fourth, the biggest problem is what Biden/Harris will do. I have already seen bizarre proposals on housing from Biden’s team,

President, Joe Biden will invest $640 billion over 10 years so every American has access to housing that is affordable, stable, safe and healthy, accessible, energy efficient and resilient, and located near good schools and with a reasonable commute to their jobs. Biden will do this by:

  • Ending redlining and other discriminatory and unfair practices in the housing market. (You mean redlining still exists with the FDIC, The Fed and Warren’s Consumer Financial Protection Bureau watching the banks??)
  • Providing financial assistance to help hard-working Americans buy or rent safe, quality housing, including down payment assistance through a refundable and advanceable tax credit and fully funding federal rental assistance. (Yes, but The Fed keeps causing home price increases through their policies)
  • Increasing the supply, lowering the cost, and improving the quality of housing, including through investments in resilience, energy efficiency, and accessibility of homes. (Increasing the supply of housing is a good thing, but easier said than done).
  • Pursuing a comprehensive approach to ending homelessness. (Noble idea, but this was a key goal of Obama’s HUD under Shaun Donovan … and we still have a terrible homelessness problem).

The Fed hasn’t been able to do anything about the declining existing home sales inventory, but they have helped home prices soaring!

My biggest fear is that closure of Fannie and Freddie and creating a Super-HUD. So, you ain’t seen nothing yet!

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