WASHINGTON, D.C. - Treasury Secretary Henry M. Paulson Jr. labeled the housing sector as the economy's top threat Tuesday morning, stating that "the longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth." Paulson's remarks came during a speech at the Georgetown Law Center.

"The biggest risk is housing," Paulson said. "We're [the government] focused on it because it is the biggest risk."

With approximately 50 million outstanding mortgages in the U.S. today, including 10 million subprime loans, Paulson suggests that the government and the financial industry bail out homeowners trying to refinance current mortgages that are scheduled to reset at much higher rates. To prevent future mortgage issues, Paulson called for an overhaul of mortgage lending laws and regulations, but he admitted that attempts to regulate the system will be a "complicated process." He added that the Treasury Department plans to release a blueprint reform overhaul plan in early 2008.

"We need to identify public policy changes that will reduce the likelihood of repeating some of the excesses of recent years while maintaining access to credit for able homeowners," he said.

In order to make improvements to the current mortgage regulatory system, Paulson identified four key elements that would need to be addressed: disclosure, origination, predatory lending, and liability. He called for simple, clear, and understandable mortgage disclosures; a higher level of integrity to the mortgage origination process; better protection from deceptive lending practices; and determining where greater liability should be imposed.

The Secretary also praised the recently announced alliance of Citigroup Inc., Bank of America Corp., and JP Morgan Chase & Co., and the HOPE NOW coalition, both formed to battle the mortgage mess. The bank group alliance is starting a fund of as much as $80 billion to help revive the asset-backed commercial paper market; the HOPE NOW coalition teams 11 of the biggest mortgage companies and is aimed at helping homeowners who are facing foreclosure.

"The efforts of this private sector alliance alone will not solve the problem," Paulson said of the bankers' alliance. "But it is a critical piece of the solution. As we work with them, we will all learn and improve the means of reaching and helping homeowners to prevent foreclosures."

Paulson called the bankers' alliance a "way to move forward," and urged other mortgage companies to join the HOPE NOW coalition.

"I call on those servicers who are not yet a part of this alliance to join," he said. "You have an obligation to help meet this challenge, and you can do so more effectively as part of an integrated effort."

Click here to view a transcript of Paulson's speech.

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