PIMCO Fund financial super-guru William Gross calls for the government to encourage the widespread refinancing of all underwater mortgages – even though his own investments and investors would take a financial hit.

USA Today’s Paul Wiseman and Stephanie Armour reported on September 29, 2010, that William (Bill) Gross, managing director of investment giant PIMCO urged policymakers to "quickly engineer a refinancing opportunity for all mortgages that are current on paymetns" and guaranteed by Fannie Mae or Freddie Mac. Mr. Gross is reported to have analyzed that turning mortgages now at 5%, 6% or 7% into 4% mortgages could pump up to $60 billion into the national economy and lift housing prices by as much as 10%.

Mr. Gross’ idea is remarkable as it is seems odd it is coming from Mr. Gross. If Mr. Gross is anything, he is a "super-guru" of bond, note and mortgage backed securities investing. Mr. Gross’ advice will actually cause Mr. Gross (and those investors he advises) to lose money and value in the short term, and maybe even in the long term.

Morgan Stanley analyst/economist David Greenlaw agreed with super-guru Mr. Gross, calling such a move a "slam dunk stimulus".

Mr. Gross explained his reasoning: "Whether it’s above water or below water, it’s the same house…there would be fewer foreclosures. There would be fewer defaults. There would be fewer empty homes. … You’ll improve the quality of the houses by keeping people in them rather than forcing them to leave."

The mortgage and banking industries are expected to resist Mr. Gross’s advice because many mortgages are packaged into securities and sold to investors and are not hold by the bank/mortgage sales company that originated the mortgage. A massive refinance program pushed by the government is a "non-starter. …. It would involve breaking a contract with the investor who’s holding the existing mortgage." says Mortgage Bankers Association vice president for research and economics Michael Fratantoni.

USA Today reports that the Obama administration has shown little enthusiasm for the widespread solution recommended by Mr. Gross.

Mr. Gross’ proposal is remarkable in that he invests (and advises investors similarly invested) in the bonds and mortgage backed securities that would take a financial hit by such a widespread refinance. Mr. Gross thus seems to believe that even if bond/mortgage investors take a hit in the short run, they will ultimately be better off with a less anemic economy and higher home prices.

The same USA Today article reports that "cash out refinances" are on the decline. Q2 2006 $83.6 billion was pulled out of homes. Q2 2010 a mere $8.3 billion in cash was pulled out of homes in refinances.

See USA Today, Section B, September 29, 2010, Paul Wiseman and Stephanie Armour. (Sorry, USA Today did not offer a link to this article on their website which I was able to locate.)

IDEAS FOR ACTION: Of course resist the idea to use your home as an ATM, even if you have a modest amount of equity. If you are struggling with consumer debt or unpaid taxes, consider consulting with a consumer bankruptcy attorney and learn about Chapter 7 and Chapter 13 before you trot down the "cash out refinance" road. With the HARP refinance program, note that you may be able to refinance your higher interest rate home notwithstanding slightly rocky credit scores and significant unsecured debt. Keep your eyes and ears open for changes and improvements to the HARP Fannie Mae/Freddie Mac refinance programs in case the Obama administration should see fit to partially follow at least some of the advice of Pimco investment giant super-guru William Gross.

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