Housing woes take bigger toll on economy than expected: Paulson

WASHINGTON : The slump in US real estate is persisting longer than expected, and may lead to over one million foreclosure notices this year for homeowners, Treasury Secretary Henry Paulson said on Tuesday.

"The ongoing housing correction is not ending as quickly as it might have appeared late last year," Paulson said in remarks prepared for delivery in a speech at the Georgetown University Law Centre.

"And it now looks like it will continue to adversely impact out 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 sub-prime 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 sub-prime," he 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 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 avert 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." - AFP/de