Falling U.S. home prices will compel financial firms to write down $1 trillion from their balance sheets—crimping bank lending and sparking sales of assets, said Bill Gross, who manages the world's biggest bond fund, according to Bloomberg News.

A total of $5 trillion of mortgage loans, or almost half of the nation's home loans, belong to ``risky asset categories'' such as subprime and Alt-A, Gross of Pacific Investment Management Co. said in commentary posted on the firm's Web site today. About 25 million U.S. homes are at risk of negative equity, which could lead to more foreclosures and a further drop in prices, he said. A home has negative equity when it's worth less than the mortgage with which it was bought.

``The problem with writing off $1 trillion from the finance industry's cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth,'' Gross wrote.

The U.S. House of Representatives approved yesterday a bill designed to shore up confidence in mortgage-finance companies Fannie Mae and Freddie Mac and stem mortgage foreclosures. Treasury Secretary Henry Paulson earlier this month proposed allowing the government to purchase equity stakes in the companies and expanding their credit lines. The proposals followed speculation that the companies, which

While Congress will enact the bill into law, lawmakers won't give the Treasury Department unlimited authority to buy Fannie Mae and Freddie Mac's debt or equity, Paul McCulley, a fund manager at Pimco, said in a separate commentary. Instead, lawmakers will probably count any government funds that go toward the companies against the Treasury's legal borrowing limit, which is controlled by Congress, he said.

The government could boost housing prices by buying one million new or unoccupied homes, ``blow them up, and then start all over again,'' Gross wrote, adding that the suggestion comes from ``one of the wisest men I know.'' Aside from that solution, the housing legislation ``is the best way to begin the long journey back to normalcy,'' he said.

Gross's forecast implies that credit-market losses are less than halfway over. Since the start of 2007, firms including Citigroup Inc., Merrill Lynch & Co., and UBS AG have reported $467.9 billion in losses and writedowns after the collapse of the U.S. submprime mortgage market roiled credit markets, according to data compiled by Bloomberg News. Firms worldwide have raised $344.2 billion of capital since the third quarter of 2007.

Former World Bank President James Wolfensohn and Charles R. Morris, the author of ``The Trillion Dollar Meltdown,'' are among those who share Gross's estimate. Wolfensohn said April 28 that losses from the global credit turmoil may climb