Paulson Defends Plan To Prevent Foreclosures
Treasury Secretary Begins 3-City Talking-Points Tour

By Neil Irwin
Washington Post Staff Writer
Tuesday, December 18, 2007; D01

ORLANDO, Dec. 17 -- Treasury Secretary Henry M. Paulson Jr. chose this hotbed of the mortgage crisis to begin a three-city tour defending the administration's plan to prevent hundreds of thousands of homeowners from going into foreclosure.

Many liberals say that the Paulson plan, which delays the resetting of certain subprime mortgages to higher interest, is too timid given the millions of households at risk of default. Many conservatives say the government is bailing out people who made bad financial decisions and is improperly undermining contracts, which could discourage investors from making money available for home mortgages.

At a crowded community center here, and in interviews earlier Monday, Paulson took both sets of critics to task. "The proper role of government is to work with the private sector to avoid a market failure," he told reporters. "The other side is why doesn't everyone get their interest rate frozen. Well, the objective is not to freeze interest rates, the objective is to prevent foreclosures."

In this central Florida city, housing prices have dropped 7 percent in the past year and foreclosures are rising rapidly, despite a generally strong economy. At the panel discussion, attended by about 150 people, Paulson repeatedly stressed that the plan is no cure-all for the housing problems. He encouraged people at risk of foreclosure to call a housing counselor and engage their lender.

"This program may not help everybody," said Bill Segal, an Orange County commissioner, "but it's going to help a lot of people and it's going to show . . ."

Paulson interrupted: "It will not help everybody. There is no silver bullet."

Instead of silver bullets, Paulson described a patchwork of government efforts meant to ease the worst potential damage of the housing and credit crises. Legislation to make the Federal Housing Administration better able to help people refinance into government-insured loans is almost complete, for example.

And the Treasury secretary gave the clearest indication to date that the Bush administration will support temporarily allowing Fannie Mae and Freddie Mac to buy up high-value loans, so long as Congress passes legislation to give the government-chartered housing-finance companies more thorough oversight.

Paulson also discussed the effort he spearheaded in the fall that sought to stabilize certain financial markets by convening top bankers to create a fund to buy up assets from structured investment vehicles (SIVs), funds that buy complicated mortgage and other assets.

The need for the new fund has become less pressing as Citigroup and other major world banks have decided to take assets of the SIVs onto their balance sheets, potentially reducing their capital but leaving less uncertainty in the market for the "asset backed commercial paper" that SIVs issue.

Paulson said there is still a role for the special fund to be created, as many SIVs are not managed by banks, and even those that have been moved onto banks' balance sheets may find the need to sell assets into markets that are not functioning properly. Paulson said he was optimistic the fund would be created by the end of the year.

He said he is spending his time trying to find more such measures that, in his view, both respect markets and could help avert serious economic downturn.

"My number one focus, number 1, 2, 3, 4, and 5, is to do everything we can to get through this with as little impact on the real economy as possible," Paulson said in an interview Monday morning. "A lot of people are saying 'do something.' But I haven't heard a lot of ideas that have been suggested that make a lot of sense to me.

"The first time I hear an idea that I think is a really good idea that we're not doing, I'm going to jump on it so quick you won't believe it."