PIMCO’s new CEO Douglas Hodge points out that the Johnson-Crapo bill lacks protection for investors who play a critical role in financing the mortgage market.

Fannie Mae Freddie Mac FHFA Federal National Mortgage Assctn Fnni Me (FNMA)

The legislation proposed by Johnson and Crapo is widely seen as President Obama’s favorite plan to reform the U.S. housing market.

Johnson-Crapo bill

Last month, US Senators Tim Johnson (D., S.D.) and Mike Crapo (R., Idaho) made a new proposal for reforming the US mortgage industry that falls in line with last year’s proposal from Bob Corker (R., Tenn.) and Mark Warner (D., Va.).

Investors like PIMCO buy Mortgage Backed Securities (MBS), where a little over half of all MBS were backed by Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) in the pre-crisis environment of 2005. However, the PIMCO CEO notes that today 99% are backed by these GSEs and with President Obama planning to wind down the GSEs, there will be a problem.

No appetite for MBS not backed by Fannie Mae and Freddie Mac guarantees

In an essay published over the weekend in Barron’s, Douglas Hodge indicated that PIMCO has no “appetite for MBS that don’t have Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) guarantees, as the protections offered to investors in non-GSE backed MBS, known as ‘private label’ securities proved to have no teeth.”

Dan Freed of The Street points out that if PIMCO and other investors won’t buy private label MBS and if the Johnson-Crapo bill winds down Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), the vast majority of the mortgage market would go away, thereby making it far more difficult for most Americans to buy homes.

PIMCO joins the frenzied campaign

Last week, a new group, Investors Unite, urged Congress to stop moving ahead with a bill to wind down the two Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).  Another new tax-exempt group called Coalition for Mortgage Security said it would campaign for legislation that protects the rights of investors in the bailed-out mortgage-finance companies.

Earlier, a conservative seniors group, the 60 Plus Association, began a $1.6 million television and radio advertising campaign against the Johnson-Crapo bill, targeting seven senators that have voiced support for a housing-finance overhaul.

Dan Freed of The Street is puzzled about PIMCO CEO’s complaint as one of the world’s largest asset managers was among several large financial institutions that agreed in 2011 to accept 8 cents on the dollar from Bank of America Corp (NYSE:BAC) in one of the largest legal disputes over MBS.