Many subprime loans were misunderstood: Paulson

By David Lawder

OAKLAND, California (Reuters) - Treasury Secretary Henry Paulson said on Thursday that lack of financial literacy among many American home buyers has contributed to the housing crisis by leading them into subprime mortgages they could not afford.

"There were a good number of people who signed a mortgage contract who didn't understand it," Paulson told local residents and financial sector professionals at a financial counseling center here.

Paulson said that many people stuck with unaffordable subprime mortgages were victims of lax lending practices by mortgage firms, deception and fraud. These cases should be prosecuted, but buyers also needed more financial education about the dangers of adjustable-rate subprime mortgages.

"I think if people were hand-held, understanding how high their mortgage payment could go, putting together a budget, figuring it out to the penny ... it would have made a difference," Paulson said, adding that financial education efforts should be increased.

Interest-rate resets that are significantly hiking monthly mortgage payments are pushing many subprime buyers into foreclosure, and high-priced California has some of the highest concentrations of failed loans.

The Mortgage Bankers Association said on Thursday that a record 0.83 percent of U.S. home loans were entering the foreclosure process in the last three months of 2007 compared with 0.54 percent in the same period a year earlier.

The U.S. mortgage delinquency rate of 5.82 percent -- just over one in twenty mortgages -- was the highest since 1985 and up from the 4.95 percent seen in the fourth quarter of 2006. Among subprime loans, almost one in six subprime borrowers were delinquent, the trade group said.

Paulson has resisted calls in Congress for a wider government bailout of distressed mortgages in order to stem falling home prices. He has favored a private-sector effort among most mortgage lenders and servicers, called "Hope Now" to work out modifications of loans to make them more affordable.