Paulson Upbeat on Economy and Markets, but Not Housing

Secretary of Treasury Henry Paulson spoke at the Post 200 Business Forum Friday, May 16 about the state of the economy and its future.Video by Jacqueline Refo & Ilene Rosenblum/
By Lori Montgomery
Washington Post Staff Writer
Saturday, May 17, 2008

Treasury Secretary Henry M. Paulson Jr. said yesterday that financial markets have stabilized since March, when the collapse of investment house Bear Stearns roiled Wall Street, and said he expects economic growth to rebound by the end of the year.

A severe housing slump remains "the biggest risk to our economy," Paulson said, adding that he was "very encouraged" to see "bipartisan progress" in Congress on a comprehensive plan to address the downturn.

"The markets are considerably calmer now than they were in March," Paulson said to business leaders gathered at a downtown hotel for a forum sponsored by The Washington Post. "In my judgment, we are closer to the end of the market turmoil than the beginning."

Paulson said the housing sector remains a major worry, as prices continue their two-year decline. About 1.5 million homeowners fell into foreclosure last year, and analysts predict that as many as 3 million more could join them over the next two years. Meanwhile, housing prices have plunged more than 10 percent.

Paulson noted the impact of sagging home prices and soaring energy costs, referring to "difficulties" in an economy that he said remains "structurally sound."

Asked by an audience member whether $100 billion in economic stimulus checks that were mailed this month to 130 million households would wind up paying for more expensive gasoline instead of stimulating the economy, Paulson acknowledged that "we've got some increasing headwinds."

But he insisted that the stimulus package approved by Congress and signed by President Bush will aid in the nation's economic recovery, creating 500,000 jobs.

"I don't mean to sound Pollyannaish," he said, but "I do believe our economy will be growing at a faster pace at the end of the year than it is now."

The Treasury secretary praised and defended the Bush administration's decision to focus on saving homeowners at risk of foreclosure by encouraging bankers to modify unaffordable home loans, particularly those with payments that escalate rapidly a few months or years after the papers are signed.

Paulson said a voluntary alliance of bankers and loan servicers assembled by the Treasury Department has modified 1.4 million mortgages since July. Meanwhile, the administration's decision to relax eligibility standards for government-backed loans has helped about 200,000 families refinance into more affordable mortgages since September.

"These are significant numbers, and a significant achievement," Paulson said, though he cautioned that 80 percent of distressed borrowers still are not responding to offers of help from alliance members. "We can't help those who aren't willing to help themselves," he said.

Congressional Democrats and other critics have charged that the administration's efforts are failing to reach the most desperate families who are months behind on their mortgage payments and in immediate danger of losing their homes. Late Thursday, the Republican and Democratic leaders on the Senate Banking Committee reached a tentative deal to help those borrowers by further relaxing eligibility standards for government-backed loans. To cover the cost of the program, Sens. Christopher J. Dodd (D-Conn.) and Richard C. Shelby (R-Ala.) agreed to use a portion of the profits from mortgage financing giants Fannie Mae and Freddie Mac that had been set aside for low-income rental housing.

The White House has threatened to veto a similar measure that the House passed last week. Paulson did not comment on that part of the Senate measure, but praised another provision that would strengthen regulation of Fannie Mae and Freddie Mac.

Aides said Shelby was optimistic that the president would support the compromise measure, which Dodd hopes to bring to a vote in his committee on Tuesday and send to Bush's desk by early July.

Dodd said he, too, hopes that the president will reconsider his veto threat. "They have to," he said yesterday. "It's voluntary. There's a haircut for everybody here. There are plenty of people out there who are very knowledgeable about this who have said this may work to keep people in their homes."

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