The cost of private origination and securitization justifies government involvement in the housing market, according to PIMCO bond-fund guru Bill Gross.

In his monthly investment outlook, Gross said 95% of existing mortgages written over the past 12 months were government guaranteed because the private market contracted so much, reiterating what he said last week at the Treasury Department’s housing-finance summit in Washington.

Gross' answer to the housing collapse recognizes "the necessity, not the desirability, of using government involvement," including rolling FNMA, FHLMC, and other housing agencies into one giant agency and guaranteeing a majority of existing and future originations" Gross said.

Gross said the private/public nature of Fannie Mae and Freddie Mac ultimately led to their demise because that structure “incentivized executives and stockholders to go for broke with the implicit understanding that Uncle Sam would be there as a backstop should anything go wrong.”

Gross believes origination points and private insurance fee would instantly disappear, if the housing market continues to be government dominated. In his proposal for what to do with the GSEs, he claims taxpayers would be protected through tight regulation, adequate down payments, and an insurance fund bolstered by a fee of 50 to 75 basis points attached to all mortgages.

"If you eliminated the private incentive and provided a tighter regulatory watchdog, we would have no more ‘liar loans’ or ‘no docs’ and a much sounder foundation for future homeowners and investors," Gross said. "The private market, to my mind, had really lost its claim as the most efficient and judicious arbiter in this particular case. Markets and private incentives without proper guardrails were as threatening to a sound economy in the 21st century as too much regulation and government ownership proved to be in the 1970s."

Write to Jason Philyaw.

The American stock markets closed lower today following the news of homes sales dropping a staggering 27%.

Stocks of big banks that have large mortgage-finance operations such as Citigroup (C: 30.87 +1.61%), Bank of America (BAC: 7.29 -0.14%), Wells Fargo (WFC: 29.60 +1.89%) and JPMorgan (JPM: 37.21 -0.75%) closed lower despite doing large amounts of trading volume, according to the New York Stock Exchange:

Like the Dow, the Nasdaq Composite Index also fell 1.3% and the S&P500 dropped 1.2%.

Economists are also reporting that the downturn in home sales is unlikely to reverse course.

Additionally, all the mortgage finance related stocks in the HousingWire Industry Ticker (posted below) fell.

Write to Jacob Gaffney.

The author holds no relevant investments.

The Mortgage Equity Conversion Asset Trust Corporation this week issued a $92m reverse mortgage securitization, according to sources at one of the three servicers on the deal.

Bank of America Merrill Lynch is the lead servicer for the private-label reverse mortgage securitization. Bank of America will service the actual loans. The two servicers declined to be named because of their respective agreements with BofA.

According to the source, the deal was first shopped around late last month. The bond is supported by 760 home equity conversion mortgages. The trade publication Total Securitization reports it’s the first such deal since the recession began and said the Standard and Poor's rated senior double-A notes come in at a 4.75% yield.

Most of the loans are in some form of distress or another. Typically, borrowers do not need to repay HECMs but run afoul when property taxes and insurance dues don't get paid.

The deal is a private placement, meaning only large, institutional investors would have been allowed to participate.

Write to Jacob Gaffney.

The US Financial Accounting Foundation (FAF) announced today that the Financial Accounting Standards Board (FASB) will grow from five to seven members.

In addition, FASB chairman Robert Herz announced his retirement after more than eight years.

FASB was operated as a seven-person team from 1973 until 2008, when it reduced its members to five.  FAF's said the transition back into the old structure is expected in early 2011, as soon as the process to recruit and evaluate candidates is complete.

"Returning the board to the seven-member structure will enhance the FASB's investment in the convergence agenda with the International Accounting Standards Board (IASB), while addressing the unprecedented challenges facing the American capital markets in the months and years ahead," said FAF chairman Jack Brennan.

Leslie Seidman will succeed Herz as acting chairman beginning Oct. 1. Seidman has been a member of FASB since July 2003. Prior to joining the board, she managed her own consulting firm and previously served as vice president of accounting policy at JP Morgan.

The board's primary function is to establish standards of financial accounting and reporting in the private sector through out the US. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants.

The Chairman of the Securities and Exchange Commission (SEC), Mary Schapiro commended the announcement, saying that it proved an on going effort from the FAF to " evaluate and improve the effectiveness and efficiency of the structure and operation of FASB."

"In addition," she added, "this should enhance the ability of the FASB to address issues facing the U.S. capital markets and the needs of investors."

The FAF is responsible for the oversight, administration and finances of both the FASB and the Governmental Accounting Standards Board.

Write to Christine Ricciardi.