Treasury Secretary Henry Paulson said Monday that the Bush Administration is working on several fronts to combat turmoil in the mortgage market, but he also said he expected the housing correction will continue for a "prolonged" period.
In a speech to the New York Society of Securities Analysts, Paulson pointed to efforts to forestall foreclosures through its Hope Now Alliance program, which is working to identify those in danger of foreclosure, developing new mortgage products to help them do that, and streamlining the mortgage approval process. He noted that the number of mortgages that reset in 2008 will increase substantially and that they are generally of lower-quality since they were underwritten in 2006, when standards were at an all-time low.
Paulson called again on Congress to pass FHA modernization, which would allow financing for an estimated 250,000 borrowers and to allow Fannie and Freddie to increase their loan limits temporarily so they could securitize jumbo mortgages.
Paulson said "the housing downturn remains the greatest risk to our economy," but he also said, "after years of unsustainable price appreciation and lax lending practices, a housing correction was inevitable and necessary."
"Looking across the entire economic landscape, the housing downturn and credit disruption will, as I have said for some time, weigh on our economy and impose a penalty on our economic growth," said Paulson. "We saw effects of this in last Friday's report of slower job growth and higher unemployment in December. It will take additional time for markets to regain confidence.We will likely have further indications of slower growth in the weeks and months ahead. The overhang of unsold houses will contribute to a prolonged adjustment, and poses by far the biggest downside risk."
He called the turmoil in the credit markets during the past five months an "appropriate and a healthy return to fundamentals." He also said, "While growth looks to have slowed considerably in the last part of 2007, our economy remains resilient and I expect it to continue to grow."
Separately, President Bush, in a speech on the economy to a business group in Chicago, did not unveil any new programs or proposals, disappointing Wall Street, which was looking for at least a hint of support for stimulative tax cuts.