UPDATE 3-PIMCO-US housing bill is key as $1 trln losses seen

(Adds McCulley comments)

By John Parry

NEW YORK, July 24 (Reuters) - The best way to help the ailing U.S. housing market recover from the $1 trillion of losses it faces will be to cut the cost of mortgages via the U.S. housing bill and rescue package for mortgage finance giants, the manager of the world's biggest bond fund said on Thursday.

"Lowering the cost of mortgage credit via the omnibus housing/GSE bill now placed before the Congress and the president is the best way to begin the long journey back to normalcy," wrote Bill Gross, chief investment officer of Pacific Investment Management Co (PIMCO) in his August Investment Outlook letter.

Mortgage finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) got some help on Wednesday when the U.S. House of Representatives passed a massive housing rescue bill after the White House dropped a threatened veto, paving the way for passage of measures aimed at shoring up the home market.

The worst conditions in the housing market since the Great Depression have put many existing mortgages at risk. A total $5 trillion of mortgage loans are in risky asset categories, Gross wrote, adding that "nearly $1 trillion of cumulative losses will finally mark the gravestone of this housing bubble."

"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, creating what Mohamed El-Erian fears as a 'negative feedback loop,'" Gross wrote.

El-Erian is co-chief investment officer and co-CEO of PIMCO.

Since last year, exposure by global financial institutions to subprime mortgage debt and structured finance products has resulted in more than $400 billion of write-downs and losses. That has led financial institutions to raise capital and cut dividends.