Paulson: Housing Getting Worse, Banks Should Help Themselves

Treasury Secretary Henry Paulson Tuesday addressed weakness in the housing market calling on lenders to help borrowers prevent foreclosure. Paulson also noted that housing will be a drag on the economy for quite some time.

In a speech delivered at Georgetown University’s law school in Washington, Paulson said that despite strong fundamentals and real economic growth in the country, the housing market will drag down growth and may get worse before it gets better.

“The housing decline is still unfolding, and I view it as the most significant current risk to the economy,” said Paulson. “The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth.”

Paulson also used the speech to call on lenders to modify their mortgage lending practices going forward and to offer immediate help to borrowers who face foreclosure. Paulson said that mass foreclosures could cause a downward spiral as home prices would suffer. But Paulson stopped short of offering direct government help to lenders who find themselves crushed by the weight of a credit crisis.

"I have no interest in bailing out lenders or property speculators," Paulson said.

Instead, Paulson intimated that Fannie Mae and Freddie Mac could play a key roll in providing funds to homeowners looking to refinance out of subprime and/or adjustable rate mortgages.

Punctuating Paulson’s comments on the length of the housing downturn, the Mortgage Bankers Association (MBA) said today that the group expects the housing recession to last until at least the end of the third quarter next year.

Doug Duncan, chief economist with the MBA said in a statement, "We have a ways to go in the housing recession. It is clearly a deep recession; at this point, we figure that will dissipate at the end of the third quarter [of 2008]."

The MBA expects existing home sales to decline 12 percent in 2007 and decline another 10 percent in 2008 before rebounding in 2009. New home sales are expected to decline 22 percent in 2007, 10 percent in 2008, and rise 6 percent in 2009.

In another validation of the housing market’s weakness, the Commerce Department reported Wednesday that housing starts in September fell to their lowest level in 14 years. According to government numbers, new home construction last month fell 10.2 percent to a seasonally-adjusted annual rate of 1.19 million homes, the lowest level since March 1993. And it wasn’t even close: in March 1993, new construction stood at a seasonally-adjusted annual rate of 1.32 million homes.