Bond giant Pacific Investment Management Co., or PIMCO, one of the biggest buyers of Fannie Mae and Freddie Mac mortgage-backed securities, warned on Monday that ending the federal conservatorship of the GSEs without Congressional input would constrict housing-finance credit and boost mortgage rates.
In a letter to Mark Calabria, director of the Federal Housing Finance Agency, PIMCO executives including Managing Director Dan Hyman, head of agency mortgage trading, said freeing the companies by executive fiat would be interpreted by investors as an end to the government’s guarantee of the MBS.
That would boost mortgage rates and force some investors to sell the bonds, the PIMCO executives said.
“While the focus to release the GSEs from conservatorship is understandable, we believe that any release particularly prior to Congressional action would have unfavorable – and likely dramatic – consequences,” the PIMCO letter said. “We strongly believe that market participants will not view the release of the GSEs as a return to the implied guarantee model that prevailed before the financial crisis, but rather, they would view them as wholly-owned private companies with no accompanying government guarantee.”
That means investors would require higher returns to compensate for greater risks, the PIMCO executives said.
“Mortgage rates will increase, homeownership will likely suffer and the national mortgage rate will no longer exist,” the executives wrote.
The “national mortgage rate” refers to the ability of lenders to offer the same rate to homebuyers with similar credit profiles and down payments in different parts of the country.
“It is almost impossible to overstate the importance of the national mortgage rate, not only for the primary and secondary mortgage markets, but most importantly, for borrowers and prospective homeowners,” the letter said. “The national mortgage rate is a central underpinning of America’s housing finance system.”
PIMCO’s warnings came in response to the FHFA’s request for comments on its proposed capital rule that Fannie Mae and Freddie Mac be required to hold about $240 billion in capital combined, based on their September 2019 assets.
Raising the capital buffer is aimed at ensuring taxpayers don’t have to cover losses for the two companies, which have been in government control since they were seized in 2008 in the midst of the financial crisis.
A year ago, the Trump administration released a blueprint for freeing the GSEs from conservatorship without requiring Congressional approval. Calabria has worked to get all the pieces in place, but if former Vice President Joe Biden usurps President Donald Trump in the Nov. 3 election those plans could be knocked off track.