Paulson: No simple solution to housing crisis
WASHINGTON (AP) - January 7, 2008 Paulson, in remarks prepared for a New York speech, said the
country was facing an unprecedented wave of 1.8 million subprime
mortgages that are scheduled to reset to sharply higher rates over
the next two years. He said this raised the possibility of a market
failure and was the reason the administration brokered a deal with
the mortgage industry to freeze certain subprime mortgage rates for
five years to allow the housing market to recover.
"By preventing avoidable foreclosures, we will safeguard
neighborhoods and communities and fulfill our responsibility of
protecting the broader U.S. economy," Paulson said in excerpts of
his speech released by Treasury. "However, let me be clear: there
is no single or simple solution that will undo the excesses of the
last few years."
Paulson said that the deal the administration brokered with the
industry to freeze certain subprime mortgage rates for five years
did not involve the use of any taxpayer money. Conservative critics
have complained that the administration's plan represented
government intrusion in the operation of markets that would end up
rewarding some people who had taken out risky mortgages.
The steep slump in housing has been a serious drag on the
overall economy. There are rising fears that the country could
topple into a recession. Those worries were heightened after a
report Friday showing that the unemployment rate jumped to a
two-year high of 5 percent in December with job growth slowing to a
crawl.
Paulson called the current housing correction inevitable after
what occurred during the five-year boom in which sales and prices
climbed to record levels.
"After years of unsustainable price appreciation and lax
lending practices, a housing correction is inevitable and
necessary," Paulson said.
Paulson and President Bush were both delivering speeches Monday
on the state of the economy. Bush received an update Friday from
Paulson, Federal Reserve Chairman Ben Bernanke and other market
regulators about how markets have been performing following a
severe credit squeeze that began in August that roiled financial
markets around the world.
The credit crisis was sparked by raising defaults on subprime
mortgages. Those defaults have already resulted in
multibillion-dollar losses at many financial institutions who
bought securities backed by the subprime mortgages that have gone
bad.
Paulson said that those large write-downs showed the system was
working.
"As markets reassess, we should not be surprised or
disappointed to see financial institutions writing down assets and
strengthening balance sheets," he said. "This is market
discipline in action and should enhance market confidence over
time."
He said financial institutions entered the current period of
turbulence with large reserves of capital to cushion against losses
and he said he expected them to continue to have sufficient capital
reserves.
Paulson said the administration is continuing to work with the
mortgage industry to ensure the quick implementation of the
agreement to freeze subprime mortgages that are due to reset if the
homeowner is living in the house, is current with payments before
they reset but cannot make the higher payments.
He said that last Friday more than 20 mortgage institutions that
are part of the HOPE NOW alliance met to work through outstanding
issues involved in the mortgage plan.
"We expect most servicers to begin fast-tracking borrowers in
the next few weeks," he said. "We are monitoring results on all
aspects of the plan, to ensure participants are fulfilling their
commitments and that homeowners are being contacted, and, when
possible, helped."