February 26, 2008 / 9:10 AM / 10 years ago

U.S.'s Swagel: mortgage aid shouldn't alter contracts

WASHINGTON (Reuters) - Efforts to save U.S. homeowners from foreclosure should not unduly alter the contracts behind troubled loans, a senior Treasury Department official said on Tuesday.

Proposals that “would retroactively change contracts on existing loans” could cause long-term harm to the housing finance system, Treasury Assistant Secretary for Economic Policy Phillip Swagel said, according to prepared remarks.

Such a move “would make it more difficult for future subprime borrowers to get into a house in the first place,” he said, addressing the Euromoney Bond Investors Congress in London. A copy of his speech was released in Washington.

In recent months, a large share of homeowners who relied on the easy terms of subprime loans have faced foreclosures as their interest rates have spiked and the nation’s housing market has flattened.

Swagel said the Treasury Department is examining whether there is enough market discipline in the current mortgage finance system.

“The originate-to-securitize model succeeded in dispersing risk ... but had the unwelcome effect of also dispersing information,” he said.

Investors had too little information about the true risks of mortgage-backed securities collateralized debt obligations and other products that helped fuel the recent housing finance bonanza.

Besides lacking information, investors relied on a faulty assumption that U.S. home values would continue to rise and so put aside some of due-diligence work.

Swagel also said U.S. economic growth looks to “remain slow” in the first part of the year but should quicken through the year.

Reporting by Patrick Rucker; Editing by Neil Stempleman

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