US mortgage writedowns may hit US$1t

July 26, 2008
US mortgage writedowns may hit US$1t
That will curb bank loans, spur asset sales: Pimco chief

(NEW YORK) Falling US home prices will force financial firms to write
down US$1 trillion from their balance sheets, crimping bank lending
and sparking sales of assets, said Bill Gross, who manages the
world's biggest bond fund.

A total of US$5 trillion of mortgage loans, or almost half of US's
home loans, belong to 'risky asset categories' such as sub-prime and
Alt-A, Mr Gross of Pacific Investment Management Co (Pimco) said in a
commentary posted on the firm's website on Thursday.

About 25 million US homes are at risk of negative equity, which could
lead to more foreclosures and a further drop in prices, he said. A
home has negative equity when it's worth less than the mortgage with
which it was bought.

'The problem with writing off US$1 trillion from the finance
industry's cumulative balance sheet is that if not matched by capital
raising, it necessitates a sale of assets, a reduction in lending or
both; that, in turn, begins to affect economic growth,' Mr Gross
wrote.

The US House of Representatives approved on Wednesday a bill designed
to shore up confidence in mortgage-finance companies Fannie Mae and
Freddie Mac, and stem mortgage foreclosures.

Treasury Secretary Henry Paulson earlier this month proposed allowing
the government to purchase equity stakes in the companies and
expanding their credit lines. The proposals followed speculation that
the companies, which own or guarantee almost half of the US$12
trillion of outstanding home loans, didn't have enough capital.

While Congress will enact the bill into law, lawmakers won't give the
Treasury Department unlimited authority to buy Fannie Mae and Freddie
Mac's debt or equity, Paul McCulley, a fund manager at Pimco, said in
a separate commentary. Instead, lawmakers will probably count any
government funds that go towards the companies, against the
Treasury's legal borrowing limit, which is controlled by Congress, he
said.

The government could boost housing prices by buying one million new
or unoccupied homes, 'blow them up, and then start all over again',
Mr Gross wrote, adding that the suggestion comes from 'one of the
wisest men I know'.

Aside from that solution, the housing legislation 'is the best way to
begin the long journey back to normalcy', he said.

Mr Gross's forecast implies that credit-market losses are less than
halfway over. Since the start of 2007, firms including Citigroup,
Merrill Lynch, and UBS have reported US$467.9 billion in losses and
writedowns after the collapse of the US sub- prime mortgage market
roiled credit markets, according to data compiled by Bloomberg News.
Firms worldwide have raised US$344.2 billion of capital since the
third quarter of 2007.

The US central bank's seven cuts in the benchmark lending rate since
last September haven't led mortgage rates to fall or slowed the
decline in home prices, Mr Gross said. Rather, yields on 30-year
mortgages have risen in that period.