Bill Gross, billionaire from the beaches of Southern California, stamp-collector par excellence and founder of Pimco, the worlds largest bond fund manager thinks our tax dollars should bail out a couple of million mortgage holders in one shape or another.
The blame belongs on the lenders who were giving money away in the form of loans to unqualified buyers of mortgages. Simple enough to figure out. All of the refi's involved in rampant escalation of housing prices so that Mr. and Mrs. Unqualified Borrower could take out equity to pay off the plasma on the wall and the new BMW's and SUV's was never in question. The fox has gotten in the hen house and it isn't pretty. Blaming the Federal Reserve for allowing all of this is ludicrous. The management of the Fed didn't have stock options and inflate their earnings because of unqualified borrowers. Where was Wall Street in all of this?
Raking it in. The party is over. Check out this piece on Gross.
NEW YORK -(Dow Jones)- When the dust settles in financial markets, policymakers will have to figure out how to fix the housing market, Bill Gross, managing director of bond giant PIMCO, says in a comment. And the solution should come not from the Federal Reserve, in the form of lower rates, but from the federal government, in the form of an outright bailout, Gross said in the comment, released Wednesday night. PIMCO is one of the largest bond funds in the world, with $693 billion in assets under management.
With market forecasters predicting two million defaults in this housing downcycle and a resulting drop in house prices of near 10%, Gross says, the situation is "serious business" indeed. And while the Federal Reserve could help prop up home prices if it were to substantially cut short-term interest rates, the Fed rate cuts won't be able to prevent hundreds of millions of dollars' worth of adjustable-rate mortgages from shifting to higher levels.
And there's no guarantee, even with short-term interest rate cuts, that mortgage lenders and investors would be willing to accept both lower mortgage rates as well as relaxed lending standards, Gross says. That's an especially big question mark considering the private mortgage market has seen mortgage bonds and whole loans plunge in value in recent months.
And if lending remains restrictive, refinancing - and getting new loans - could still be difficult, putting continuous pressure on borrowers and housing prices even with a much lower fed funds rate.
A better solution, Gross says, would be for a government bailout on the scale of the Savings and Loan, Resolution Trust Corporation remedy of the 1990s. In other words, the government should come in and absorb - in one form or another - the losses caused by several years of loose mortgage underwriting. "Why is it possible to rescue corrupt S&L buccaneers in the early 1990s and provide guidance to levered Wall Street investment bankers during the 1998 LTCM (Long Term Capital Management) crisis, yet throw two million homeowners to the wolves in 2007?," he says.
Despite the fact such a rescue "admittedly might bail out some speculators who deserve worse," Gross says, it would also "support millions of hardworking Americans whose recent hours have become ones of frantic desperation."
The current administration should create "an RMC - Reconstruction Mortgage Corporation," Gross proposes. Or failing that, should "make some modifications to the existing FHA (Federal Housing Administration) program. ... Write some checks, bail 'em out, prevent a destructive housing deflation that Ben Bernanke is unable to do."
-By Danielle Reed, of Dow Jones Newswires
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