By Howard Schneider
Washington Post Staff Writer
Tuesday, October 16, 2007; 11:39 AM

Treasury Secretary Henry M. Paulson Jr., in a speech reviewing problems in the U.S. mortgage market, said the country should improve consumer protection for home buyers and consider a national system for licensing mortgage brokers to prevent them from abusing the patchwork of state laws that currently govern their industry.

Delving into a sensitive issue underlying recent turmoil in global credit markets, he also said a study is needed to look at possible conflicts of interest between hedge funds, banks and other financial institutions and the credit-rating agencies that helped clear the way for some of their riskier investments.

In remarks prepared for delivery at Georgetown Law Center this morning, Paulson said that rising home default rates and the collapse of real estate prices are a product of loose lending standards that spread during the real estate boom earlier this decade.

As it stands, he said, "home buyers get writer's cramp from initialing pages and pages of unintelligible and mostly unread boilerplate." Sometimes, he said, they don't understand the true terms of their loan or -- in the case of the adjustable rate mortgages popular during the height of the boom -- how payments might increase over time.

The "reset" of adjustable rate loans is thought to be contributing to rising default rates, a trend expected to continue as rate adjustments on millions of mortgages come due.

At the loan closing, the secretary wrote, "the most critical facts, including potential future monthly payments, should be on a single page in clear, easy-to-understand language."

In addition, he said the United States should consider replacing the disparate state rules that govern mortgage brokers with a national system.

Between predatory lending and complicated disclosure, "some of the conduct and practices I have learned about are shameful," Paulson said. "The development of a uniform national licensing, education and monitoring system for all mortgage brokers is worth considering."

An advance copy of Paulson's speech was obtained by The Washington Post. Initial details were in a New York Times report this morning.

Problems in the housing and credit market contributed to a sharp downturn in global stock markets over the summer. Although much of that ground has been regained, the full effect of mortgage defaults and credit problems has yet to be determined.

Federal Reserve Chairman Ben S. Bernanke said yesterday he thought housing would be a drag on economic growth until next year. Paulson today endorsed that outlook, saying he is not sure how long it will take for the real estate and construction industries to recover.

"The housing decline is still unfolding, and I view it as the most significant current risk to our economy," Paulson said. U.S. markets were heading lower this morning following Bernanke's remarks, with the Dow Jones industrial average down around 90 points after the first hour of trading.

The administration has put several strategies into play to ease the crisis, including encouraging lenders to help struggling homeowners avoid default, and proposing changes that would allow the Federal Housing Administration to back more homeowners with mortgage insurance.

In addition, Treasury encouraged a group of large banks to intervene in other parts of the credit market by creating an $80 billion fund to help ensure the flow of credit to businesses.

Along with regulations to better protect consumers when they buy homes, Paulson said some of the broader capital market issues underlying the credit crisis need to be addressed -- in particular the role rating agencies played in assessing investments that later proved dubious.

Rating agencies give grades to different types of securities that are backed by corporate bonds, home mortgages and other forms of debt. In the case of securities backed by subprime loans, the agencies initially provided acceptable ratings -- clearing the way for investors -- only to downgrade those securities as default rates rose.

Critics say the rating agencies could have foreseen the subprime problem but did not want to impede the flow of investment.

"It is clear that we must examine the role of credit rating agencies, including transparency and potential conflicts of interest," Paulson said.