Housing prices should be allowed to fall: Paulson

WASHINGTON (Reuters) - Housing prices need to fall further to permit shell-shocked housing markets to stabilize and policy-makers should not interfere with that process, Treasury Secretary Henry Paulson said on Wednesday.

Speaking to the U.S. Chamber of Commerce, Paulson said regulators including the Federal Reserve were "vigilant" and doing everything they could to minimize damage to the economy but played down the value of a more direct government role.

"A correction was inevitable and the sooner we work through it, with a minimum of disorder, the sooner we will see home values stabilize, more buyers return to the housing market, and housing will again contribute to economic growth," he said.

Despite calls to "do something about housing," the focus should be on "choosing policies that minimize the impact of -- but do not slow -- the housing correction," Paulson said.

The U.S. Treasury chief also said no one should conclude that broker-dealers and other big financial firms will get permanent access to new lending facilities made available by the Federal Reserve to ease market stresses.

"Despite the fundamental changes in our financial system, it would be premature to jump to the conclusion that all broker-dealers or other potentially important financial firms in our system today should have permanent access to the fed's liquidity facility," Paulson said.

PRECEDENT FOR TURMOIL?

Instead, he suggested the Fed's actions "should be viewed as a precedent only for unusual periods of turmoil."

The Fed set up a special lending facility on March 17 that lets the 20 primary dealers in U.S. government debt borrow at the same discount rate that only banks were able to do.

Paulson said the Fed, the Securities and Exchange Commission that regulates Wall Street firms and the Commodities Futures Trading Commission should keep working together and consider "whether a more formalized working agreement" was needed among them to ensure uniform regulation.

He said policy-makers were fully aware that it was a housing downturn that precipitated capital market turmoil and posed the biggest risk to the economy but made clear he felt it had room to run yet and should be allowed to do so.

Paulson said only about 2 percent of U.S. home mortgages were in foreclosure but said that as many as 2 million foreclosure starts might occur this year. In addition, he said that 8.8 million households may now have negative home equity -- meaning their mortgages are higher than the house could be sold for -- and said that will rise.

SPECULATORS ON THEIR OWN

Still, he said that if homeowners who are "underwater" on their mortgages walk away from them, they are no more than speculators and don't deserve special help.

"Washington can not create any new mortgage program to induce these speculators to continue to own these homes, unless someone else foots the bill," Paulson said.

He noted that a number of lawmakers have proposed initiatives to ease the strain on homeowners and welcomed their ideas but added "most are not yet ready for the starting gate."

Democratic lawmakers are pressing for a more active government hand to ease the strain on hard-pressed homeowners, possibly through purchases, restructuring and resale of failing mortgages, but the Bush administration has turned a cold shoulder to such suggestions.

(Reporting by Glenn Somerville, Editing by Chizu Nomiyama)