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.

At the financial counseling center in an Oakland shopping mall run by Operation Hope Inc., a separate, non-profit group, Paulson said lender disclosures to borrowers were not adequate.

Many are written by bank lawyers to "cover their rear ends," he said, but should say in plain language what the interest rate and payment are and how much under certain circumstances it should rise.

Operation Hope founder John Hope Bryant also said too many home buyers in the subprime sector simply looked at initial payments when they signed their mortgage contracts. His own father lost a home in the 1980s by ignoring the interest rate he was paying, he said.

"These intelligent people who in many cases made six figures, asked the same question my dad asked they bought a house and said, 'What's the payment?' That's the wrong way to buy a house," Bryant said.

Buyers needed to look at the total costs and work out a budget, he said, adding that he considers the subprime the subprime crisis a "middle-class issue."

(Reporting by David Lawder; editing by Gary Crosse)