Source:
BloombergBy Sandra Hernandez
July 24 (Bloomberg) -- Falling U.S. home prices will force financial firms to write down $1 trillion from their balance sheets, crimping bank lending and sparking sales of assets, said Bill Gross, who manages the world's biggest bond fund.
A total of $5 trillion of mortgage loans, or almost half of the nation's home loans, belong to ``risky asset categories'' such as subprime and Alt-A, Gross of Pacific Investment Management Co. said in commentary posted on the firm's Web site today. About 25 million U.S. homes are at risk of negative equity, which could lead to more foreclosures and a further drop in prices, he said. A home has negative equity when it's worth less than the mortgage with which it was bought.
``The problem with writing off $1 trillion from the finance industry's cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth,'' Gross wrote.
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`Blow Them Up'
While Congress will enact the bill into law, lawmakers won't give the Treasury Department unlimited authority to buy Fannie Mae and Freddie Mac's debt or equity, Paul McCulley, a fund manager at Pimco, said in a separate commentary. Instead, lawmakers will probably count any government funds that go toward the companies against the Treasury's legal borrowing limit, which is controlled by Congress, he said.
The government could boost housing prices by buying one million new or unoccupied homes, ``blow them up, and then start all over again,'' Gross wrote, adding that the suggestion comes from ``one of the wisest men I know.'' Aside from that solution, the housing legislation ``is the best way to begin the long journey back to normalcy,'' he said.
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