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."
