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CNBC ON DIGG

Pimco's Gross: Fed Should Buy Mortgages

By: CNBC.com | 07 Mar 2008 | 02:42 PM ET

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The Federal Reserve needs to take a more active role in stemming the housing crisis, possibly by exchanging Treasury notes for mortgage notes, Pimco Bonds Chief Information Officer Bill Gross said on CNBC.

Gross said the Fed's move to increase the allocation for its Term Auction Facility will help the markets, but it needs to be more aggressive to help rally the real estate market.

"I think the increased TAF facility this morning will help, but in effect it's sort of a small step for a Fed chairman," Gross said. "What really needs to be done is for the Fed to come in and to lower long-term mortgage rates."

Gross suggested the Fed can do so by exchanging Treasury securities for mortgage securities. He compared the idea to something called Operation Twist in the 1960s, where the Fed sold Treasurys and bought mortgages.

The TAF move, he said, "doesn't really provide a floor for mortgage prices and a ceiling for mortgage yields, which is incumbent I think in order to stop the slide of home prices. I mean We still have 30-year Fannie Mae conventional mortgage at 5 3/4 which means 6 1/4, and 7 percent-plus for jumbos.

"The housing market cannot be supported with those types of yields. The Fed needs in effect to buy the mortgage market and not to basically lend on it."

On other matters, Gross said Pimco has bought bonds from Thornburg Mortgage [TMA Loading... () ], which Thursday said it would miss a margin call, sending its shares plummeting. He said he expects "double-digit type returns" on the purchase.