Paulson: Housing to hurt economy for some time

By David Lawder

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson warned on Tuesday that a housing downturn would hurt the economy for some time, and he called for assistance to struggling homeowners and new mortgage regulations.

Paulson, in remarks at Georgetown University's law school, said he believed further declines in home construction lay ahead, but the U.S. economy remained healthy and would manage to grow.

"But let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy. The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth," Paulson said.

Paulson said the federal government should work to avoid foreclosures on primary residences to prevent a downward cycle in property values and minimize the housing downturn's impact on the economy.

But he said this must be weighed against the "moral hazard" of encouraging investors to repeat their bad decisions by bailing them out.

"I have no interest in bailing out lenders or property speculators," Paulson said.

He called for steps to make more affordable mortgage products available for struggling homeowners, and said the U.S. Senate should approve regulatory reforms governing government sponsored mortgage enterprises Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

Paulson said the GSEs could also increase the flow of funds to refinance subprime borrowers if they securitized a greater number of their prime mortgages into a well-functioning market for such GSE mortgage securities.

He also said financial regulators should work for "interim improvements" to the mortgage regulatory system while evaluating longer-term, broader reform that may include combining some agencies.

He said key areas for interim reform include improved disclosure rules and a uniform national licensing, education and monitoring system for all mortgage brokers. New rules and standards in the mortgage origination process also could combat predatory lending, he said.

But Paulson, a Wall Street veteran who headed Goldman Sachs before taking charge of the Treasury last year, said he opposed imposing greater liability on securitizers and investors.

"In my view, this is not the answer to the problem. Imposing broad liability provisions on investors and securitizers would very likely generate significant unintended consequences. It would potentially paralyze securitization," he said.