Bond-fund manager Bill Gross considers government involvement a “necessity” in the nearly $1-trillion mortgage market.

Gross, chief of Pacific Investment Management Co. (Pimco), said that if the government completely pulls out from the industry, it would lead to “crippling any hopes of a housing-led revival to the economy.”

He also suggested that the government must form a single unit that will comprise the two state-backed mortgage finance firms – Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp.) – and other relevant federal agencies. That organization must then be tightly regulated. According to gross, that body must also implement adequate down-payment requirements and have an insurance fund as well.

By implementing such measures, stockholders will no longer “go for broke” as they did with Fannie Mae and Freddie Mac. Those stockholders were confident of buying bad loan guarantees because Fannie Mae and Freddie Mac had the reputation of being state-backed, he added.

Meanwhile, Gross also noted that private lenders charged too high, leading to the involvement of the government in the mortgage industry. “The private market was nowhere to be found because they charged too much. It was the cost of private origination and securitization, perhaps more than any other factor, that justified government involvement,” he said. Currently, the two government sponsored enterprises and government agencies guarantee around 90% of all new housing loans.

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