Treasury Secretary Henry Paulson this morning (Oct. 16) told an audience of law students at Georgetown University that the housing "correction" is proving deeper and longer lasting than federal officials anticipated just months ago.

"The ongoing housing correction is not ending as quickly as it might have appeared late last year," Paulson said, according to a text of his remarks. "And it now looks like it will continue to adversely impact our economy, our capital markets, and many homeowners for some time yet."

Paulson said the housing slump was caused by a combination of unsustainably high demand, easy credit, and builder enthusiasm to meet rising demand. "The housing correction has its roots in an eight-year period of exceptional home price appreciation which was fueled by an increased demand for, and an abundant supply of easy credit," Paulson said. "Speculation also played a significant role, as the share of buying activity by investors or individuals buying second homes more than doubled from 2000 to 2005.Homebuilders responded to the extraordinary demand for more and larger homes as if it would last forever."

Paulson said he still believed the economy would be able to withstand the housing downturn, but added that he thinks it "is having a real impact on our economy." He warned, "But let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy. The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."

Paulson called for an agressive federal response to the housing crisis. He expressed support for industry efforts to provide new and flexible mortgage products to help struggling homeowners refinance out of loans they can not afford. He endorsed passage of both FHA and GSE (Fannie Mae and Freddie Mac) reform packages now working their way through Congress. And he said, "We also need to make some changes in our laws and rules in order to prevent some of the excesses and abuses of the last few years from happening again" and called for a streamlining and modernization of the "patchwork structure" of regulation and enforcement authority over the mortgage business.