‘Housing Decline Is Still Unfolding,’ Treasury Chief Says

WASHINGTON, Oct. 16 — Treasury Secretary Henry M. Paulson Jr. offered a pessimistic view of the country’s housing slump today as he called for help for hard-pressed homeowners and new mortgage regulations. But he urged Congress not to overreact by passing excessively harsh measures.

“Let me be clear: Despite strong economic fundamentals, the housing decline is still unfolding, and I view it as the most significant current risk to our economy,” Mr. Paulson said in a speech at a Georgetown University law forum. “The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth.”

Mr. Paulson said that “a first and important step” is to identify struggling borrowers early, steer them to mortgage counselors “and find a sustainable mortgage solution.”

“We have an immediate need to see more loan modifications and refinancing and other flexibility,” Mr. Paulson said. “For many families, this will be the only viable solution.”

Citing recent surveys showing that as many as half of the borrowers who have gone into foreclosure never had prior discussions with mortgage counselors, Mr. Paulson said, “That must change; early intervention is critical.”
But he warned against what he sees as an overreaction to “predatory lending” practices, and he said Congress must proceed with caution in determining whether to impose greater liability on mortgage “securitizers and investors,” or risk “cutting off investment inflows to the housing market.”

Mr. Paulson’s remarks today reflected perhaps the most sobering assessment by an administration official of the housing industry. Two months ago, when credit markets around the world were freezing up in panic over failed mortgages, Mr. Paulson said he was confident investors would work things out for themselves.

“We’re going to work through this problem just fine,” he said in an interview with CNBC on Aug. 21. “I think what the American people need to understand, these things take a while to play out.”

Mr. Paulson says he still holds that view. But in a sign that administration officials are more worried about underlying problems in the markets than they had previously let on, Mr. Paulson and other top Treasury officials are prodding and pushing Wall Street firms and the mortgage industry to come up with solutions — and helping devise some of them as well.

The plan announced Monday involves no money from taxpayers, and it was negotiated primarily between the banks themselves. But it highlighted Mr. Paulson’s growing effort to marry two competing goals of the Bush administration: to stabilize the battered markets for mortgages and housing, but to avoid a government bailout that might encourage investors to take even bigger risks in the future — what economists call “moral hazard.”

“I have no interest in bailing out lenders or property speculators,” Mr. Paulson said today. “Still, we must recognize the very real harm to families affected by the housing downturn.”

The Treasury’s move coincided with a gloomy assessment of both the mortgage and housing markets by Ben S. Bernanke, chairman of the Federal Reserve.
“Despite a few encouraging signs, conditions in mortgage markets remain difficult,” Mr. Bernanke told the New York Economic Club in a speech in Midtown Manhattan Monday evening.

Mr. Bernanke said the overall economy is still growing, suggesting that the Fed is not likely to cut interest rates at its policy meeting at the end of this month unless conditions worsen markedly in the next couple of weeks. But he predicted that the housing market has yet to hit bottom and that it was likely to be a “significant drag” on growth through early next year. A weak economy, he added, could reinforce problems in the credit markets.

Mr. Paulson’s effort to hammer out a plan with major banks to support mortgage-backed securities was headed by two of his top deputies, Robert Steel and Anthony Ryan, both Wall Street veterans. The two men herded rival bank executives into meetings and conference calls over the past month, and helped devise a plan aimed at jump-starting the frozen mortgage market.

Mr. Paulson is becoming more active on other fronts as well. In his speech today, he called for new nationwide rules for mortgage lenders, changes in the practices of credit-rating agencies and tougher scrutiny by federal banking regulators.

Mr. Paulson also tried to step up pressure on mortgage lenders and mortgage-servicing companies to renegotiate terms for people in danger of defaulting on expensive subprime loans.

By EDMUND L. ANDREWS
Published: October 16, 2007
New York Times Business

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