Removing govt guarantee could 'wreck US economy'

Withdrawing Federal government support for the US mortgage market could wreck the economy and leave US house prices moribund for years, a leading bond fund manager has warned the Obama Administration.

Bill Gross, chief investment manager at Pimco, said that it was unrealistic to expect Wall Street to fund mortgages at low interest rates without government guarantees.

The veteran fund manager was speaking at a conference convened by the Treasury Secretary, Tim Geithner, who is looking for ways to wean the mortgage market off generations of government subsidies.

"Unfortunately, the government is part of our future," Gross told him.

"Without government guarantees, mortgage rates would be hundreds of basis points higher, resulting in a moribund housing market for years."

Since the 1930s, the US has worked to drive down mortgage rates and expand home ownership, first by setting up government-sponsored companies Fannie Mae and Freddie Mac, which guaranteed mortgages and supported a secondary market for mortgage-backed securities.

When Fannie Mae and Freddie Mac collapsed in 2008, the federal government nationalised them and now it is now directly guaranteeing more than 90 per cent of new mortgages taken out in the US.

The expansion of Fannie Mae and Freddie Mac's activities is considered a contributory factor in the housing bubble that burst in 2007.

The Treasury Secretary promised there would be no return to that public-private model, but said that without some government involvement, "the risk is that future recessions could be more severe because the financial system would not have the capital to support mortgage lending on an adequate scale."

- INDEPENDENT