Pimco Warns FHFA’s Fannie-Freddie Plan Threatens Housing Finance
Pacific Investment Management Co., one of the world’s biggest bond investors, is warning that a regulator’s push to end federal control ofFannie Mae andFreddie Mac could threaten the U.S. housing finance system by forcing the sale of mortgage bonds and boosting loan interest rates.
Pimco executives, in aletter to theFederal Housing Finance Agency, expressed concern that Fannie and Freddie will be freed without congressional legislation, which they said investors would interpret as as 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.
Newport Beach, California-based Pimco is one of the world’s largest bond investors and had about $1.92 trillion in total assets under management in June.
Explicit U.S. support for Fannie and Freddie was limited before they were placed in conservatorship during the 2008 financial meltdown, but many investors assumed the government would protect their bonds in a crisis. That view was validated by a massive taxpayer bailout after the mortgage market collapsed. The government now has contracts with Fannie and Freddie that guarantee about $254 billion in additional bailout money should the companies need it.
Pimco and other bond investors say that agreement isn’t enough, even if Fannie and Freddie are required to hold a lot more capital. They are calling on Congress to pass legislation to provide an explicit U.S. guarantee of the companies’ mortgage securities.
U.S. lawmakers have failed in several attempts to pass legislation that would overhaul the nation’s mortgage-finance system. Many of those proposals would have provided an explicit guarantee on some mortgage bonds.
Calabria, a libertarian economist who formerly worked for Vice President Mike Pence, has said he plans to release the companies on his own, but he could face difficulty achieving that goal. Imposing high capital requirements would protect taxpayers, but doing so could raise mortgage costs and make it more difficult for Fannie and Freddie to raise money from equity investors.
The conflict is reflected in the formal responses to Calabria’s capital proposal. Comment letters from the mortgage industry, affordable housing advocates and equity investors generally said the proposed requirements are too high. Right-leaning think tanks said the proposal is too low.
To satisfy MBS investors in the absence of legislation, Pimco said in its letter, Fannie and Freddie would have to hold more than three times the amount of capital proposed by the FHFA, an amount that would likely significant raise mortgage rates and severely curtail the companies’ businesses.
So far, the mortgage market doesn’t seem to be reflecting bond investors’ stated worries. As of Friday, Freddie Macsaid the 30-year mortgage rate was below 3%.
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