US MBS reinvestment issue "overblown," Pimco says

By Al Yoon

NEW YORK, April 9 (BestGrowthStock) – Big investors in the $5
trillion mortgage-backed securities market are unlikely to
reinvest cash from Fannie Mae and Freddie Mac as the companies
strip bad loans from the bonds, Scott Simon, a managing
director at PIMCO, said on Friday.

A lack of reinvestment may surprise analysts who for weeks
have predicted principal would be dumped back into the market
and support prices, which affect consumer rates. This would
soften any blow as the Federal Reserve ended its $1.25 trillion
MBS purchase program in March, analysts have said.

But the reinvestment issue is “overblown,” Simon said on
the Pacific Investment Management Co. Web site.

The Fed, U.S. Treasury, Freddie Mac, Fannie Mae and Asian
central banks probably won’t reinvest in MBS as the mortgage
finance giants address delinquent loans, he said.

“Over half of the mortgages that are going to be paid down
live between these groups, so the reinvestment of cash from
delinquent loans that are bought out of pools will likely be
less than half the total,” he said.

Simon also said the Fed could have ended its mortgage
purchases as early as October, when investors had sufficiently
recovered from the financial crisis. The $400 billion bought
since then inflated prices to peaks in December and early
January, he said.

“The final $400 billion or so of Fed purchases were pricey,
some some private investors, including PIMCO, sold a portion of
their holdings to the Fed,” he said. “Thus, 2010 began with
many money managers underweight mortgages.”

The MBS by the end of March were “still priced on the
richer side of fair,” he said. The valuations have not changed
so far this month, he said in an interview.

Private buyers could step back in if valuations fall by as
little as 0.15 percentage point, he said. This means there will
be little effect on rates seen by consumers, he added.

One “game changer” to that outlook would be sales of
mortgage bonds by Fannie Mae and Freddie Mac, he said.

Stock Market Money

US MBS reinvestment issue “overblown,” Pimco says