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Bill Gross: Washington should stay in mortgage business Add to ...

OK, so not long after we posted Related contentour item on PIMCO's Bill Gross and the inadvertent preview of his upcoming commentary on the U.S. mortage market, the company has posted the entire commentary - presumably somewhat ahead of schedule.

We can now bring you the details of Mr. Gross's thoughts - which, as is often the case with the outspoken bond-fund king, should generate plenty of discussion around the Wall Street water coolers.

The commentary stems from a recent trip to Washington Mr. Gross took to express his views to key policy makers - something that, surprisingly, he doesn't do very often, given how much influence he has on market matters. In fact, he says the visit was his first in an official capacity in more than 35 years at PIMCO. (My immediate thought is, Washington really needs to be talking with these kinds of people much, much more often.)

Mr. Gross's key message while in D.C. was "the necessity, not the desirability, of using government involvement" in helping finance residential housing in the United States.

It's a tough position to take after your country has just come out of a massive mortgage crisis that included the near-collapse of government-backed agencies that were overwhelmed with low-quality mortgages that turned toxic.

Indeed, there's a strong sentiment in many quarters that maybe taxpayers' dollars shouldn't be backstopping mortgages of Americans who can't afford big, expensive houses and shouldn't be encouraged to buy them just to eventually default on them.

But whether you agree with these critics or not, Mr. Gross argues that the genie is already out of the bottle, and it would be very dangerous to try to get it back in. For one thing, he said, the economic fallout would be serious, to say the least.

"Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending," he writes. "The cost would be enormous in terms of yields - 300-400 basis points higher than currently offered, crippling any hopes of a housing-led revival to the economy."

"Americans now know that housing prices don't always go up, and that they can in fact go down by 30-50 per cent in a few short years," he added. "Because of this experience, private mortgage lenders will demand extraordinary down payments, impeccable credit histories, and significantly higher yields than what markets grew used to over the past several decades.

"Could an unbiased observer truly believe that housing starts of two million or even one million per year could be generated under the wing of the private market? In front of Treasury Secretary Geithner and the assembled audience, I said that was impractical. Let me amend that to 'ludicrous.' "

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