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Rate freeze not the key, Paulson says

In an interview, the Treasury chief defines sub-prime plan's goal as avoiding foreclosures and chaos in the market.

December 20, 2007|Tom Petruno and Peter Y. Hong | Times Staff Writers

Treasury Secretary Henry M. Paulson Jr. on Wednesday downplayed the mortgage-rate-freeze element of the Bush administration's program to help the sinking housing market, saying it wasn't the principal focus of the plan -- despite the raised hopes of some struggling homeowners.

In a meeting with Times reporters and editors in Los Angeles, Paulson suggested that there had been too much emphasis in the media on the rate-freeze aspect of the pact that major loan servicers and investors reached with the administration Dec. 6.

At the time, Paulson said about 600,000 homeowners with adjustable-rate sub-prime mortgages might quickly qualify to have their lenders voluntarily freeze their loan rates at current levels for five years, rather than face a big increase at the reset date in the next 2 1/2 years.

But Paulson said Wednesday that the administration's program "was never about how many interest rates people could freeze. . . . This is about foreclosure avoidance."

Some mortgage industry analysts and consumer credit experts have raised doubts about lenders' willingness to simply freeze rates for a large number of sub-prime borrowers. Critics of loan servicers say the firms have been slow to modify loans for strapped homeowners this year. That doesn't augur well for a widespread rate freeze, they say.

Paulson, who this week traveled to Florida, Missouri and California to explain the White House's efforts to address the sub-prime crisis, suggested that the program should be judged by its overall success in getting lenders to work with borrowers to limit "needless foreclosures."

When the plan was unveiled, the Treasury chief said that in addition to the 600,000 sub-prime borrowers who might qualify for a rate freeze, another 600,000 could qualify to have their loans refinanced at more affordable rates.

The administration's jawboning of lenders has angered some people who say foreclosures should be allowed to rise and put further downward pressure on home prices -- which in turn could make housing more affordable for renters who are waiting to buy.

But Paulson said it was crucial to avoid a "market failure" in housing that could bring on "chaos."

"I want markets to work," he said in the interview. "I would define a market failure as the system not being able to cope in a way where foreclosures took place that would otherwise not have taken place if there was a smaller volume. So foreclosures take place that aren't in the investor's interest, aren't in the homeowner's interest, aren't in the community's interest, aren't in the greater economy's interest."

The result could be a plunge in home prices that would "force market values down in a way . . . in which the market wasn't intended to work," Paulson said.

Asked about former Federal Reserve Chairman Alan Greenspan's suggestion that the government provide direct cash aid to struggling sub-prime borrowers rather than lean on lenders to modify loans, Paulson wouldn't address the idea directly. But he said the administration was committed to its program and that "if I had heard better ideas, we would have adopted them."

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tom.petruno@latimes.com

peter.hong@latimes.com

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