Notes From Underground: Notes From Underground: Bill Gross calls for “full nationalization”of the mortgage finance system (REPOST)

In the wake of the recent housing foreclosure issues, we bring you this piece from August about Bill Gross and his call to fully nationalize the mortgage finance system.

The housing confab was the big story Tuesday as the Obama administration was trying to figure out how to put the biggest slush fund to work. Last Christmas Eve, the U.S.Treasury–under the spell of eggnog and mistletoe–nationalized Fannie Mae and Freddie Mac by removing the caps on the losses that the two GSEs would be allowed to absorb.We don’t know where “PIMCO’s” Bill Gross was but we had assumed that the removal of loss caps was nationaliztion by stealth. Now as the largest holders of MBSs next to the FED, he is openly calling for outight government control of the mortgage market because Gross doesn’t believe there is room for the private sector. Yes, he is correct if the mortgage market reverts to NINJA loans and other zero-down types of nonsense. However, if the originate-to-distribute model were to be restructured so that only deserving loans were made, private lenders would be lining up to get into that business. We caution our readers to understand that today’s conference on GSEs was meant to give some type of cover to an already conceived plan of how Fannie and Freddie can absorb more losses and for the Obama team to gain some political advantage.

Our conjecture is that the two behemoth GSEs are going to force a rewrite of existing mortgages so that as many borrowers as possible will be locked in at much lower rates than their credit ratings would allow. A 30-year fixed rate that was close to the Treasury’s borrowing rate would be similar to a giant tax cut for all of those eligible. This, we believe, will be the October surprise and the result will be that the Democrats are working for Main Street. The result will be positive for the housing market because it will stem foreclosures in the near term and the government will absorb the hit as will some bond holders will be forced to accept a lower rate of interest (see GM and Chrysler for bond holders rights). The Obama administration has not gotten the bump in employment and they know that they will lose control of Congress if they do not appear to be doing something dynamic for Main Street. The biggest problem is who is going to absorb the haircut on the lowered rates besides Treasury. Hmm … it may be the Chinese who also hold a great deal of GSE paper. Wow, lifting the spirits of Main Street while causing mild pain to the Chinese. The only question is how it will affect the U.S. image in global capital markets? Otherwise, we are sure it will play in Peoria.



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5 Responses to “Notes From Underground: Notes From Underground: Bill Gross calls for “full nationalization”of the mortgage finance system (REPOST)”

  1. Danny Says:

    SO faced with two alternatives: a massive re-write of all of these loans or have the Federal Reserve buy practically every mortgage followed by inflating their way through the losses…which would you choose?

    On a digression, has anyone noticed the new obsession with engineering inflation? It seems like the Fed and various pundits practically want inflation for the sake of inflation. They never talk about engineering demand which leads to inflation which prompts new investment activity…they are literally just talking about increasing the price level as though somehow higher prices by default will lead to new demand followed by new investment.

  2. Ron Theda Says:

    Danny and Yra,

    To trump the liquidity trap, the Fed is trying to engineer negative real interest rates (inflation higher than rates) to get the money off the sidelines and increase velocity of money… Well the money came off but went to foreign currencies! Now countries like Brazil are fighting currency strength… Yra can Brazil’s central bank somehow devalue the currency with some kind of announcement to burn all the foreign inflows (I am one of those :))? Am I missing something about the power of Brazil to real do anything, I dont think they can, but would appreciate to know if I am missing something basic as this is not my forte. If anything I am inclined to be buying this dip in Brazil, as it is the first retrace on this move. Thanks

  3. Arthur Says:

    Yra, we miss you. A must-listen. Hayek vs. Keynes Rap Anthem:

  4. yra harris Says:

    two very good points—the FED needs inflation to relieve the debt load .That is a story that won’t go away .Ron Brazil will probably have to go to a holding tax high enough to eradiacte the full carry adavantage of the REAL- they don’t won’t to lower interest rates for fear of igniting inflation,so a modified currency control seems to be the least painful for them

  5. Ron Says:

    So the G-20 agreement ‘not to devalue’ means the yen and Brazillian real will be allowed to go the moon, while the US is allowed to devalue? This can’t be what will happen.

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