Remarks by Treasury Secretary Paulson

On Actions Taken and Actions Needed in U.S. Mortgage Markets, at the Office of Thrift Supervision National Housing Forum

Dec. 3, 2007

Washington, D.C.—Thank you, John. The Office of Thrift Supervision plays an important role in our financial system, and I appreciate your leadership at this agency. Thanks, also, for hosting this second national housing forum and providing a timely opportunity for me to give an update on the U.S. economy and mortgage markets. I mention timeliness because housing issues are affecting citizens all across the country, and because Congress returns to Washington today. In the final days of this congressional session, there is much that Congress can do to help America's homeowners.

As we are all aware, the housing and mortgage markets are working through a period of turmoil, as are other credit markets, as risk is being reassessed and re-priced. We expect that this turbulence will take some time to work through, and we expect some penalty on our short-term economic growth. The positive news is that we are confronting and managing these challenges against the backdrop of a strong global economy. And the U.S. economy remains fundamentally sound—core inflation is contained, continued job gains are providing a good foundation for household spending, corporate balance sheets remain healthy overall, and strong growth abroad is supporting U.S. exports. Our economy will continue to grow, but it is facing a number of challenges.

And as I have said before, the housing market downturn is the biggest challenge to our economy. When home foreclosures spike, the damage is not limited only to those who lose their homes. Homes in foreclosure can pose costs for whole neighborhoods, as crime goes up and property values decline.

Avoiding preventable foreclosures, then, is in the interest of all homeowners.

Mortgage market financial innovation has benefited the U.S. economy and U.S. homeowners; it has also introduced some of the challenges we face today. Financial innovation led to the creation of mortgage products that put homeownership within the reach of more people. At the same time, innovation also made riskier loans—with no down payments or minimal documentation—more widely available. Similarly, securitization has brought benefits and challenges—making more capital available for mortgages, but creating greater market complexity. As a result, we now have an array of different market participants, often with different interests.

Still, foreclosure is expensive for all participants—lenders and investors—and this expense is an incentive to avoid foreclosure when a homeowner has the financial wherewithal to own a home. An appropriate role for government is to bring the private sector together when innovation has greatly increased the complexity of achieving beneficial solutions for all parties involved. The number of subprime mortgage resets is going to increase dramatically next year, and we need to make sure the capacity is there to handle it.

And so, Treasury is aggressively pursuing a comprehensive plan to help as many able homeowners as possible keep their homes. We began by convening a diverse group of market participants, who represent all segments of the mortgage industry. Based on what we have learned, we are implementing a three point plan to avoid preventable foreclosures and to minimize the impact of the housing downturn on the U.S. economy.

First, we are increasing efforts to reach able homeowners who are struggling with their mortgages. Second, we are working to increase the availability of affordable mortgage solutions for these borrowers. Third, we are leading the industry to develop a systematic means of efficiently moving able homeowners into sustainable mortgages. This morning, I will provide more detail on the three elements of this plan, an update on the private sector's efforts, the government's efforts, and the additional steps that are needed in each area.

Increase Efforts to Reach Struggling Homeowners

First, we must reach homeowners who are struggling, reach them early, and reach them with information and hope. The need for this effort became starkly clear when we learned that 50 percent of foreclosures occur without borrowers ever talking to their lender or a mortgage counselor. We knew that if we are to make a difference that number has to be reduced.