The Reconstruction Mortgage Corporation

Home prices are likely to plummet by nearly 10 percent if the Federal Reserve, Treasury and Congress don't switch into high gear, says Bill Gross, manager of the giant PIMCO bond fund. Expanding on an earlier Fortune column in his September Investment Outlook, Gross says cutting short-term interest rates won't stop adjustable-rate mortgage rates from going up, and would only guarantee the resurgence of the kind of speculative investing that got us into the current mess.

Instead, Gross is calling for new fiscal policies of "Rooseveltian proportions" -- the creation of a Reconstruction Mortgage Corporation. If the government was willing to absorb the bad debts of the savings and loan industry through the Resolution Trust Corporation, why "throw 2,000,000 homeowners to the wolves in 2007?" Gross asks.

"This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard working Americans whose recent hours have become ones of frantic desperation," Gross says, rejecting suggestions by the Wall Street Journal that homeowners facing foreclosure get used to renting again.

Acknowledging that establishing a "Reconstruction Mortgage Corporation" is likely to be anathema to fiscal conservatives, Gross jokes: "look at it this way: your stocks and risk-oriented levered investments will spring to life like the wild flowers in Death Valley after a flash flood. And if you’re a Republican office holder, you’d win a new constituency of voters – 'almost homeless homeowners' – for generations to come."

At the very least, Gross says, modify FHA loan programs so they can be brought to bear on the situation (Congress will resume debate on a bill, the Expanding American Homeownership Act of 2007, that would do just that, when it comes back from vacation).

Wonder what Gross thinks of seller-funded down payment assistance?   

Update: While the bill mentioned above would expand the pool of borrowers eligible for FHA loans by raising the eligible loan limit in high cost areas, allowing zero-down loans, and introducing risk-based pricing, the Bush administration also has some authority to implement changes on its own. The Washington Post, citing an unnamed HUD official, said
FHA could be given the go-ahead to refinance borrowers in default, which is more along the lines of what Gross is proposing.   

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