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PIMCO's Gross Sees Government Backing of Mortgages Undesirable but Necessary

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The cost of private origination and securitization justifies government involvement in the housing market, according to PIMCO bond-fund guru Bill Gross. In his monthly investment outlook, Gross said 95% of existing mortgages written over the past 12 months were government guaranteed because the private market contracted so much, reiterating what he said last week at the Treasury Department’s housing-finance summit in Washington. Gross' answer to the housing collapse recognizes "the necessity, not the desirability, of using government involvement," including rolling FNMA, FHLMC, and other housing agencies into one giant agency and guaranteeing a majority of existing and future originations" Gross said. Gross said the private/public nature of Fannie Mae and Freddie Mac ultimately led to their demise because that structure “incentivized executives and stockholders to go for broke with the implicit understanding that Uncle Sam would be there as a backstop should anything go wrong.” Gross believes origination points and private insurance fee would instantly disappear, if the housing market continues to be government dominated. In his proposal for what to do with the GSEs, he claims taxpayers would be protected through tight regulation, adequate down payments, and an insurance fund bolstered by a fee of 50 to 75 basis points attached to all mortgages. "If you eliminated the private incentive and provided a tighter regulatory watchdog, we would have no more ‘liar loans’ or ‘no docs’ and a much sounder foundation for future homeowners and investors," Gross said. "The private market, to my mind, had really lost its claim as the most efficient and judicious arbiter in this particular case. Markets and private incentives without proper guardrails were as threatening to a sound economy in the 21st century as too much regulation and government ownership proved to be in the 1970s." Write to Jason Philyaw.

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