Government-sponsored enterprises Fannie Mae and Freddie Mac need to ease the requirements for down payments so debt-stressed consumers can afford to buy houses again, Pimco's Bill Gross told CNBC.
The easing of up-front cash requirements is paramount so housing can play a leading role in the economic recovery, said Gross, co-CEO of Pacific Investment Management Co. (Pimco) and head of the world's largest bond fund.
Record-low mortgage rates won't help housing as long as consumers who are trying to reduce debt, don't have the cash to take advantage of 4 percent interest rates. Housing starts and purchases for July hit multi-year and in some cases historic lows as federal tax credits expired and unemployment remained stubbornly high.
"To the extent that you can finance a 3.5 to 4 percent (mortgage) with a 20- or 25-percent down payment, most...households can't come up with the money," Gross said. "So there needs to be some type of cautionary reduction in terms of down payments."
The government can influence down payment regulations through the control it exerts over GSEs Fannie Mae [FNMA 0.3075 0.0075 (+2.5%) ] and Freddie Mac [FMCC 0.33 -0.005 (-1.49%) ], which control about 90 percent of the secondary mortgage market.
On a recent trip to Washington, Gross made his recommendations known to Treasury Secretary Timothy Geithner.
These ideas sound like tried and true bureaucratic clap trap to me. For the record, I love when Gross talks money, but I've come to hate some of his comments recently about government stimulus.
Here's where I disagree with Bill Gross:
1) Easy money loans are a significant part of the reason why we've ended up in this bubble nightmare in the first place. Now he wants the government to issue more of the same insanity. I feel that's foolish because it would eventually create more loans that end up being upside down creating more foreclosures in the future.
2) If we actually had a free market system, one without government intervention, real estate values would decline to a point where saving a 20% down payment would be much easier because real estate would then be affordable and a realistic long term value. Then we wouldn't need low down payment loans.
3) The US backed agencies represent 90% of the mortgage lending in the country, and that's our problem. We've blown US tax payer's money already on Freddie and Fannie, and now the problem is moving to the FHA.
If we got rid of government lending agencies completely, rates would go higher to attract banks to the arena to replace these agencies, which would force banks to raise depository rates to attract deposits so they could make those loans. Real estate would go lower and become more affordable because of higher rates, but that would make it easier for people to save a 20% down payment while removing the government from being King Banker.
That sounds like capitalism to me, and I love a free market. It shouldn't be the government role to stimulate real estate, that's the crux of the bubble issue in the first place.
Dear Bill: If you think the idea is so good, then have PIMCO make all the no money down payment loans they can. Have PIMCO take the risk for a 4.3% return. I wonder what your investors would think?
It's quite simple. In my world of commercial lending, we require everyone to put 25-35% down on a commercial building when obtaining financing. That insures the owner has some of his own skin in the deal and he's less likely to walk away. Does that insure the bank won't take a loss? No. But it does help mitigate the amount of the loss. If we made everyone have a 20% down payment when buying a home, real estate initially would fall in price, because at current levels it's difficult to save that kind of money so demand for real estate would fall. However, once it did fall, the 20% down would be much easier and real estate would be a far better value and banks would take less risk and we'd have less foreclosures and bank balance sheet issues. It's that simple. All we need to do is put our lenders hat on and take lending risk only. When we do no money down loans, we are now taking investor or ownership risk, and that's not the role of the lender. Again, it's that simple.
Hope all is well.
J.D. Rosendahl, Rosey