WASHINGTON (AFP) — The woes of the US housing market are dragging on longer than expected, and may lead to over one million foreclosure notices this year for homeowners, Treasury Secretary Henry Paulson said Tuesday.
Paulson, in a Washington speech, said the problems in housing represent "the most significant current risk" to the US economy and that policymakers and the private sector should mobilize to alleviate the pain and avert future crises.
"The ongoing housing correction is not ending as quickly as it might have appeared late last year," Paulson said said in remarks at Georgetown University Law Center.
"And it now looks like it will continue to adversely impact our economy, our capital markets and many homeowners for some time yet. Even so, I believe we have a healthy, diversified economy that will continue to grow."
Paulson said home foreclosures are rising sharply, especially on subprime loans granted to people with weak credit histories.
"Current trends suggest there will be just over one million foreclosure starts this year -- of which 620,000 are subprime," Paulson said.
He said it was a "troubling" statistic that two million adjustable-rate loans will be reset to higher rates in the next 18 months, and that it was unclear how many of those might put homeowners in jeopardy of foreclosure.
The slide in housing began last year after the once red-hot US property market suddenly turned cold and the the speculative money pouring into real estate started flowing out.
The problems were compounded by higher interest rates, which made it harder for many home buyers, especially those who took out adjustable-rate loans, to make payments.
And because many of the risky or "subprime" loans were repackaged into mortgage-backed securities, the problem loans spread to the financial sector, prompting lenders to become more cautious.
The troubles in the sector have meant weakness in home construction and turmoil in the financial sector, with the end of the problems not yet in sight, Paulson stated.
"Despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant risk to our economy," he said.
"The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."
Paulson said efforts are being made in the public and private sectors to help homeowners avoid the loss of their properties, but that more needs to be done to avert a future crisis.
In view of the lax practices and allegations of fraud in the lending industry, Paulson said mortgage lending practices need to be more controlled.
"We need to bring a higher level of integrity to the mortgage origination process," he said.
"The development of a uniform national licensing, education and monitoring system for all mortgage brokers is worth considering."
Additionally, Paulson said more scrutiny is needed of credit rating agencies in view of the failures of mortgage securities, many of which had strong investment ratings despite the inclusion of risky loans.
"It is clear that we must examine the role of credit rating agencies including transparency and potential conflicts of interest," he said.
"We must also assess if regulations and supervisory policies are encouraging an over-reliance on ratings by financial institutions and investors."
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