December 6, 2007 / 6:49 PM / in 10 years

Paulson: Avoiding foreclosures in interest of all

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson said on Thursday the government had to step in to help broker a plan to aid distressed homeowners because everyone would suffer if foreclosures shot higher.

Paulson spoke shortly after U.S. President George W. Bush announced new steps to help troubled subprime mortgage borrowers who face steep increases in their mortgage payments as initial “teaser” interest rates reset sharply higher.

“It is in everyone’s interest — homeowner, servicer, investor — to develop a market-based approach to avoid foreclosures that are preventable,” Paulson said at a news conference with Housing and Urban Development Secretary Alphonso Jackson.

Pressed to explain how a five-year interest-rate freeze is anything more than a patch on a problem that will return, Paulson conceded “this plan is not a silver bullet, you’re not going to be able to solve every conceivable issue.

“What five years does is it gives people, it gives us as a country, a chance to work through this housing cycle,” he said. Paulson said people could use the time to rebuild their credit rating and possibly qualify for conventional loans instead of the subprime variety that generally are offered to people with less than perfect credit records.

Even if they don’t, “Under the worst condition, you’re going to go through a refinancing program five years from now but we’ll have five years to deal with it,” he added.

Paulson said the existing system for handling problem loans could not have dealt with an anticipated 1.8 million owner-occupied subprime mortgage resets that will take place in 2008 and 2009.

“I saw a role for government here — to convene market participants with common interest to determine if, and then how, they could develop a shared framework to address both the market complexity and the upcoming value of mortgage resets,” Paulson said.

The plan was worked out with private lenders, who agreed to freeze interest rates for subprime borrowers who meet certain requirements.

Many of the subprime mortgages, which service borrowers with spotty credit histories, were packaged into securities that were then resold to investors around the world, spreading the fallout from the rising number of mortgages that have gotten into trouble as homeowners’ payments falter.

“The complexity that exists in current mortgage and mortgage securities markets poses some very practical and difficult problems,” Paulson said.

Paulson said investors now were “on board” with the plan for a temporary interest rate freeze and, as a result, “the risk of litigation should be manageable.”

Jackson said his department’s Federal Housing Administration already was helping some subprime mortgage borrowers to refinance into more favorable loans.

“Since early September we have received more than 118,000 refinancing applications, and already 35,000 homeowners have refinanced into an FHA-backed loan,” Jackson said.

He urged Congress to speed up consideration of a bill to allow the FHA to insure bigger mortgages in high-cost states and lower down payment requirements. That alone could allow the FHA to help more than 250,000 families by the end of 2008, Jackson claimed.

Reporting by Glenn Somerville; Editing by Chizu Nomiyama

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