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Private mortgage lenders are too scarred by the U.S. real estate collapse to lend to home buyers at reasonable rates and under reasonable conditions, said Bill Gross, co-chief investment office of PIMCO.
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In the last 12 months, 95 percent of originated mortgages had government backing. The private market was “nowhere to be found because they charged too much,” said Gross.
While government-backed mortgages yielded 3.5 to 4 percent, private (non-conforming) prime mortgages yielded 6 to 8 percent. By charging these exorbitantly high rates, the private market essentially views the risks of mortgages as quite high, said Gross.
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Going forward, not only will they charge high interest rates, these risk-averse private lenders will also demand high down payments and impeccable credit histories. In short, private lenders, without government backing, are too scarred to provide loans under reasonable conditions.
Perhaps the most severe damage during the Great Depression in the 1930s was the 25 percent unemployment rate. As a result, at least one generation of Americans became savers. During the Great Recession real estate crash, mortgage lenders learned that housing prices do not always go up; in fact, they can fall 30 to 50 percent in a few years.
This harrowing experience has scarred mortgage lenders and will impact them “for decades to come,” said Gross.
To fill this void, Gross recommends having the government guarantee the majority of existing and future mortgages, but with sound financial rules and the elimination of profit-seeking pressures from private shareholders. This would thereby provide capital to home buyers and revive the real estate market,
This solution may revitalize the real estate market while also avoiding the excesses that led to the real estate crash in the first place.
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