PIMCO warns of danger in Fannie, Freddie privatization

Bond giant fears plan could lead to another bailout

FHFA Director Mark Calabria and PIMCO CEO Emmanuel Roman (Getty, iStock)
FHFA Director Mark Calabria and PIMCO CEO Emmanuel Roman (Getty, iStock)

Pacific Investment Management Company, one of the world’s largest bond investment firms, said the housing market could be in trouble if Fannie Mae and Freddie Mac’s privatization plan goes forward — and it could lead to another government bailout.

In a letter Monday, PIMCO warned that if the Federal Housing Finance Agency’s plan to end government conservatorship of Fannie and Freddie proceeds, “mortgage rates will increase, homeownership will likely suffer, and the national mortgage rate will no longer exist.”

Newport Beach, California-based PIMCO is concerned that if the FHFA bypasses Congress to privatize Fannie and Freddie, investors — including some of its clients — would stop buying Fannie and Freddie mortgage-backed securities. These investors would be under the impression that the government is no longer guaranteeing these securities, according to PIMCO.

Mark Calabria, who leads the Federal Housing Finance Agency, is attempting to put together $240 billion in capital that Fannie and Freddie would need to hold to go private. Calabria, a former director of the Cato Institute who worked with Vice President Mike Pence, is facing immense pushback for some of his initiatives from the housing and mortgage industries and, at times, even President Donald Trump.

But now PIMCO has entered the conversation. With close to $2 trillion in assets under management, PIMCO is perhaps the most powerful player in the fixed-income universe and is one of the largest buyers of Fannie and Freddie mortgage-backed securities.

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Fannie and Freddie do not originate mortgages, but instead buy them from lenders, securitize them and sell them to investors. Fannie and Freddie also help control mortgage rates.
The government took over the entities after the 2008 financial crisis to stave off insolvency because of their exposure to subprime loans.

PIMCO presented a list of reasons why it was important for the government to retain control of the two federal housing agencies. At one point in its letter, PIMCO argued that government backing helps keep mortgage rates the same in housing markets across the country.

“The explicit government guarantee facilitates this ability for otherwise similar borrowers to have access to the same homogenous rate across very heterogeneous regional markets,” PIMCO wrote.

PIMCO concluded, “Releasing the GSEs as private companies will not only fail to produce these benefits, but if past is prologue, will likely end in another bailout by way of conservatorship.”

Calabria recently announced the FHFA would look to impose higher fees on lenders on the refinancing of Fannie and Freddie mortgages. Mortgage groups said that would add $1,400 on average to a borrower’s refinancing costs. After pushback, the agency delayed the new fee from September until December.

Mortgage rates are at historic lows, fueling the housing and mortgage markets during an otherwise lagging economy.