Wednesday, February 10, 2010

Bill Gross of PIMCO is a housing activist

You know that things are dire when investors and community activists are banding together to try to “persuade” banks to reduce the principal on homeowners’ mortgages.

Reality has dawned for investors like PIMCO. A year ago, Bruce Marks, a housing activist based in Boston, was excoriating PIMCO and its co-founder Bill Gross for his intransigence in allowing any mortgage modifications. But as the mortgage situation grew more dire with no end in sight, enemies became allies :

Mr. Marks says mortgage-bond investors like Pacific Investment Management Co., or Pimco, a unit of Allianz SE, are "on the same page we're on." That is a significant change of tune by the well-known activist, who is chief executive of a Boston nonprofit group called Neighborhood Assistance Corp. of America. NACA counsels struggling mortgage borrowers.

Last year, Mr. Marks argued that investors were blocking loan modifications. He put a bright-red label that said "predator" over a picture of Pimco co-founder Bill Gross on NACA's Web site.

Mr. Marks also threatened to send bus-loads of protesters to bond manager Pimco's headquarters in Newport Beach, Calif. Pimco headed off the protest by inviting Mr. Marks in for a chat with Pimco Chief Executive Mohamed El-Erian and other senior executives. Mr. Marks came away persuaded that banks, not investors, are dragging their feet on loan modifications.

Now that 25% of homeowners are “underwater”, meaning they owe far more than their homes are worth, investors are seeing that the only way they may get anything on their mortgage-backed securities holdings is if the mortgage principal is reduced to some level near market value.

Homes bought at the top of the bubble may not regain their price level until 2040. In the meantime, homeowners are stuck in “house arrest”, paying out huge sums of money they can never recoup or borrow against. The strategic option of jingle mail, taking a 7-year hit on one’s credit rating and renting at a much lower level than their mortgage payments gets more attractive every day. At least that way one can save thousands a year against the next layoff or medical emergency.

The investors see that. The monkey wrench in the machinery is the banks. They much prefer the option of lowering interest to 2% or extending mortgages 40 years rather than reducing principal. But principal reduction is by far the more effective way to keep mortgage holders in their homes making monthly payments. Investors have already marked down the MBS to distressed levels.

Now housing activists and Bill Gross are on the same page (gasp!), marching against the banks, trying to keep people in their homes.

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