Paulson: don't "overreact" to market turmoil

CHICAGO (Reuters) - U.S. Treasury Secretary Henry Paulson said on Friday it was important not to overreact to current market turmoil by imposing regulations that hurt markets' ability to innovate.

"There are millions of Americans in homes now because of these innovations," Paulson said at an event sponsored by Neighborhood Housing Services of Chicago, which counsels homeowners who are facing difficulty making their payments.

Paulson was referring to the spate of exotic mortgage products that have become a focus of attention because of financial market disruption stemming from rising defaults on payments by subprime mortgage holders.

Subprime loans are made to less creditworthy borrowers, and lenders in recent years have designed a variety of products, many offering low introductory rates that escalate later, in order to create more business.

Some U.S. lawmakers are calling for stiffer laws to ensure that lenders are not taking advantage of low-income borrowers by not spelling out how much their mortgage payments will jump when they adjust or "reset" after the introductory period.

The Bush administration is resisting calls for more regulation but Paulson repeated Congress should move swiftly to approve changes to the Federal Housing Administration's loan insurance program for low-income borrowers.

During the recent U.S. housing boom, many borrowers who traditionally would have sought an FHA loan turned to subprime lenders who offered more flexible terms and less red tape. But it is in subprime loans where most of the current spate of rising defaults is centered.

The Bush administration has proposed helping less creditworthy borrowers by lowering the required downpayment for FHA loans and raising the limit on mortgages that would be eligible for them.