Paulson: Housing to hurt US economy for some time
10/16/2007
U.S. Treasury Secretary Henry Paulson speaks at the Georgetown Law Forum on "Homeownership, Mortgage Markets and the U.S. Economy” at Georgetown University, October 16, 2007.Reuters | October 16, 2007
WASHINGTON -- U.S. Treasury Secretary Henry Paulson warned today that the housing downturn would hurt the economy for some time, and he called for new mortgage regulations and assistance for struggling homeowners.
Paulson, in remarks at Georgetown University's law school, said he believed further declines in home construction lay ahead, but argued the U.S. economy remains healthy.
"Despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy," Paulson said. "The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."
Paulson said the federal government should work to limit foreclosures on primary residences to prevent a downward cycle in property values and minimize the housing downturn's impact on the economy.
This must be weighed against the "moral hazard" of bailing investors out of their bad decisions, thus encouraging them to repeat mistakes. "I have no interest in bailing out lenders or property speculators," Paulson said.
Asked by an audience member how he will respond to pressure on U.S. dollar weakness at a meeting of Group of Seven finance ministers in Washington on Friday, Paulson reiterated his view that a strong dollar was in America's interests.
"The strong dollar is in our nation's interest. Currency values should be determined in competitive markets, based on underlying economic fundamentals," he said.
NEW MORTGAGE FUNDS, RULES
Paulson called for steps to make more affordable mortgage refinancing products available for homeowners struggling with new, higher mortgage payments as their adjustable-rate mortgages reset.
He repeated calls for the U.S. Senate to approve regulatory reforms for government-sponsored mortgage enterprises Fannie Mae and Freddie Mac. He said the GSEs could also increase the flow of funds to refinance subprime loans if they securitized a greater number of their prime mortgages into a well-functioning market for such GSE mortgage securities.
They should work with mortgage insurers to develop new products to help "blemished-credit" borrowers, he added.
Financial regulators should also work for "interim improvements" to the mortgage regulatory system while evaluating longer-term, broader reform that may include combining some agencies, he said.
These improvements include new Federal Reserve rules for improved consumer disclosures, and Paulson also proposed a uniform, national licensing, education and monitoring system for all mortgage brokers to prohibit "shameful" conduct that has led to some of the sector's problem.
Although mortgage brokers are regulated at the state level, he said such rules vary from state to state and may not apply to brokers employed by federally regulated institutions.
A national licensing approach should take into account prior fraudulent or criminal activity and should require certain basic training standards, he said.
New rules and standards in the mortgage origination process also could combat predatory lending, Paulson said. He encouraged the Fed to use its authorities under the Home Ownership and Equity Protection Act to stamp out unfair and deceptive practices in a review currently underway.
But Paulson, a Wall Street veteran who headed Goldman Sachs before taking charge of the Treasury last year, said he opposed imposing greater liability on securitizers and investors.
"In my view, this is not the answer to the problem. Imposing broad liability provisions on investors and securitizers would very likely generate significant unintended consequences. It would potentially paralyze securitization," he said.