The government needs to bail out homeowners who have defaulted on their mortgages in order to "salvage" the U.S. economy, PIMCO founder Bill Gross told CNBC.
"This is not something that the Fed can handle on its own," Gross said, referring to the Federal Reserve's cut in the discount rate last week to stem a growing credit crunch.
A rise in housing defaults may slash U.S. home prices by 10% this year, Gross said, and that could bring the economy closer to recession.
The Federal Housing Administration can prevent turmoil in the housing market from spilling into the broader economy, said Gross, who is also chief investment officer at PIMCO, the nation's biggest bond fund.
"I'm talking about the FHA taking foreclosed loans and taking them onto their balance sheet, keeping interest rates low, preventing those adjustable rate mortgages from moving higher, and basically salvaging the U.S. economy," Gross said.
Gross pointed out that PIMCO has no subprime mortgage investments.