A senior manager at the world's biggest bond fund criticized a federal mortgage rescue plan as short-sighted and said U.S. home prices may not hit bottom until 2010.
U.S. home prices may fall as much as 30 percent from the market's peak and likely won't trough until 2009 to 2010, according to Mark Kiesel, a portfolio manager at Pacific Investment Management.
"The question is, do we do it over a period of two to three years, or do we do it in 10?" Kiesel said in an interview. "Japan chose 10, and that didn't work so well."
Pimco, a unit of Munich-based insurer Allianz SE , managed $721 billion in assets through the end of September.
Kiesel, a longtime bear on the U.S. housing market, also questioned merits of a plan that President Bush is expected to unveil Thursday to help struggling American homeowners avoid foreclosure.
"This reeks of moral hazard," Kiesel said. "This is pure politics as we enter an election year, and it's not going to help the problem. It's going to prolong the bubble."
Kiesel said government interference in the free market may do more harm than good.
"A government bailout which alters contractual interest payments to bondholders will fuel moral hazard problems and raise mortgage rates for future borrowers and home buyers," he said. "This is not a path we want to head down in which government intervention bails out homeowners who failed to act responsibly."
The White House said Bush would speak on the battered U.S. housing market at 1:40 pm Washington D.C. time on Thursday. The White House said the president would discuss steps to help homeowners avoid foreclosure.
The plan that industry sources said Bush would outline is designed to temporarily hold rates steady for subprime borrowers who could not afford to stay in their homes otherwise.
As proposed by a mortgage investor trade group, the plan would offer a five-year "rate freeze" for subprime loans made from 2005 through the end of July, if the loans are due to reset over the next two and a half years, according to a document obtained by Reuters.
"The entire capital markets system revolves around contracts and the ability to have a legal claim on assets," Kiesel said. "If that fundamental premise is challenged, it's only going to make the costs of capital go up in the future."