Paulson Calls for Housing Help, Patience

In prepared remarks for a speech to the New York Society of Security Analysts, Paulson warned that about 1.8 million subprime mortgages will reset to mostly higher interest rates over the next two years, "raising the potential of a market failure."

Noting that the mortgage industry isn't equipped to handle the volume of resets, Paulson said the administration is fostering an effort to "prevent this market failure," citing its plan to help fast-track a large number of refinancings for borrowers able to afford their current mortgage rates but not the reset rate.

The administration estimates that as many as 1.2 million subprime borrowers could be helped by its initiative, either through refinancing or a workout. Those that can't pay the reset rate and are unable to refinance will be eligible to receive a freeze on their starter rates for five years. Most mortgage services are expected to start fast-tracking borrowers in coming weeks.

Paulson defended the streamlined process against criticism that it is breaking mortgage contracts, saying mortgage servicers are fulfilling their contractual obligations by "pursuing all loss-mitigation options when it is the best interest of investors, as they normally would."

Paulson also repeated his call for Congress to pass a reform bill for the Federal Housing Administration and allow for a temporary increase in the loan limit for mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) so that they can purchase jumbo mortgages - those exceeding $417,000.

The House and Senate have each passed FHA reform legislation, but those versions must now be reconciled.

Economy Expected To Continue To Grow
While the housing slowdown is the "greatest risk" to growth, Paulson said the economy "remains diverse and resilient" and should remain in an expansion mode.

However, he added, "There is no single or simple solution that will undo the excesses of the last few years."

Thus, he urged patience as the administration deals with the short-term consequences of the housing downturn first and "thoughtfully evaluates next steps."

"Our most immediate goal is to minimize the impact on the real economy," he said, adding that the administration is also evaluating a number of longer-term policy concerns, including securitization, risk management and credit rating agencies.

President George W. Bush is considering an economic stimulus package that could be unveiled in the State of the Union address later this month, while Democratic legislators are formulating their own proposals.

Paulson called the repricing of risk occurring in global credit markets "a healthy return to fundamentals," and said it will take additional time to work through given the complexity of the instruments.

He acknowledged renewed risk aversion, but said actions by the Federal Reserve and other central banks to inject liquidity into markets are "having their desired effect," citing a narrower spread between the London interbank rate and fed-funds futures.

Recent moves by banks to bring troubled structured investment vehicles, or SIVs, back onto their balance sheets are a sign that the asset-backed commercial paper market is recovering, Paulson said. Major banks decided last month that a planned rescue fund for SIVs, which suffered big losses from the subprime mortgage crisis, was no longer needed.

The Treasury secretary also welcomed recent moves by major financial institutions to write down troubled assets or make other moves to strengthen their balance sheets. Financial firms raised $83 billion in equity during the second half of 2007, a 20% increase over the year-earlier period.

"This is market discipline in action and should enhance market confidence over time," he says.

Investors shouldn't be disappointed in the balance sheet-related moves or concerned that much of the new capital is from overseas, said Paulson, encouraging other firms to follow suit.

-- Tom Barkley, Dow Jones Newswires