Treasury Chief Warns of Ongoing Housing Troubles

The troubled U.S. housing market isn't bouncing back as quickly as once expected, and it poses the "most significant current risk to our economy," U.S. Treasury Secretary Henry Paulson told an audience at Georgetown Law Center earlier today.

During his talk, Paulson expressed concern that the current subprime mortgage difficulties could create ripple effects in other lending markets and discourage investments important for the economy's ongoing health.

"Deteriorating subprime mortgage performance over the last several months led investors to question their assumptions about the credit quality and value of many assets," Paulson said. "The reassessment of risk has played out more rapidly in some markets than in others. In certain asset classes, risk has been reassessed and repriced fairly quickly as investors gained confidence in their fundamental assessments."

However, he added, "some sectors that are characterized by more complex securities or that rely more heavily on securitization and ratings -- such as the jumbo mortgage market, the leveraged loan market, and the asset backed commercial paper market -- are still operating under some stress with impaired liquidity. Conditions are better than they were a few weeks ago, and we continue to see improvements, but it will take longer for these sectors to fully recover."

While homeowners with subprime mortgages are feeling the most pain during the current housing market correction, a growing number of homeowners with prime mortgages are also having trouble keeping up with their payments, Paulson said. Both the number of mortgage defaults and foreclosures are rising nationwide. Between 2000 and 2006, Paulson said, the number of foreclosures in general has risen by 50 percent, while foreclosures on subprime loans increased by more than 200 percent.

"Current trends suggest there will be just over 1 million foreclosure starts this year -- of which 620,000 are subprime," Paulson said.

Nationwide, there are about 50 million outstanding mortgages, of which about 10 million are subprime loans. Of those subprime mortgages, about 2 million are expected to reset to higher rates over the next year-and-a-half.

"That statistic is true, relevant, and troubling, but it is not the complete picture of the risk going forward," Paulson said. "Many of those borrowers will be able to afford their new mortgage payment or they will be able to refinance into another more affordable mortgage."

Paulson said the government needs to take three steps to address the situation before it grows worse: one, help as many homeowners as possible avoid foreclosures, which hurt not only individual families but affect whole neighborhoods as well; two, minimize the effects of the current downturn without bailing out lenders or property speculators; and three, identify ways to reduce the possibility such a mortgage fallout could happen again while still encouraging access to credit for qualifying homeowners.

"We ... need to make some changes in our laws and rules in order to prevent some of the excesses and abuses of the last few years from happening again," Paulson said. "While financial innovation has helped increase the homeownership rate in recent years, it has also introduced new complexities ... Furthermore, our complex and fragmented regulatory system complicates an already difficult situation."

"This patchwork structure should be streamlined and modernized," he said.

U.S. Treasury Department, "Remarks by Secretary Henry M. Paulson, Jr., on Current Housing and Mortgage Market Developments, Georgetown Law Center." URL: (http://treasury.gov/press/releases/hp612.htm)