PIMCO Sees Flaw in Obama Fannie Freddie Wind-down Plan

NEW YORK (TheStreet) --PIMCO, one of the world's largest asset managers, has joined a growing chorus of critics of legislation proposed by Sens. Tim Johnson (D, SD) and Mike Crapo (R., ID) which is widely seen as President Obama's favorite plan to reform the U.S. housing market by winding down Fannie Mae (FNMA) and Freddie Mac (FMCC). 

In an essay published over the weekend in Barron's, newly-appointed PIMCO CEO Douglas Hodge pointed to what he described as a "significant oversight" in the legislation: the lack of protections for investors such as PIMCO who play a critical role in financing the mortgage market, even though it is largely invisible to most homebuyers.

These investors buy mortgage backed securities (MBS) - bonds backed by pools of mortgage obligations. While a little more than half of all MBS were backed by Fannie and Freddie in the pre-crisis environment of 2005, today 99% are backed by these government sponsored entities (GSEs), according to Hodge. Since President Obama wants to wind down Fannie and Freddie, this is a problem.

According to Hodge PIMCO has no "appetite" for MBS that don't have GSE guarantees, because the protections offered to investors in non-GSE backed MBS, known as "private label" securities, proved to have no teeth.

If PIMCO and other investors won't buy private label MBS and the Johnson Crapo bill winds down Fannie and Freddie, the vast majority of the mortgage market would go away, making it far more difficult for most Americans to buy homes.

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