Paulson: Subprime help needed - but no bailout

NEW YORK (CNNMoney.com) -- Treasury Secretary Hank Paulson is walking a fine line, pushing the need to help troubled mortgage borrowers without rewarding past risky behavior.

"I have no interest in bailing out lenders or property speculators. Still, we must recognize the very real harms to families affected by the housing downturn," Paulson said in prepared remarks for a speech given Tuesday at Georgetown University.

Treasury Secretary Hank Paulson

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"We must take steps to minimize the neighborhood effects and the macroeconomic effects of this housing market correction," he continued.

Paulson pointed out that President Bush charged him, along with HUD Secretary Alphonso Jackson, to work closely with market participants to "modify" at-risk mortgages.

Paulson noted that as many as 50 percent of failing borrowers never contact their lenders to address their problems. Paulson said the industry must increase its outreach efforts.

Last week, Paulson announced the creation of a new alliance of mortgage servicers, counselors and investors called "Hope Now" that was designed to get to more troubled borrowers and find solutions to their mortgage problems.

Tuesday, he called for more flexibility in loan modifications and refinancing.

"For many families, this is the only viable solution," Paulson said. But he pointed out that many servicers are not well staffed to provide "mitigation" services even though preventing foreclosures is in the best interest of investors in mortgage-backed securities.

Loan servicers, who handle billing and payments after a loan has been made, must put more trained credit counselors in place to deal with the increases in volume of borrowers in need of help.

Paulson also called upon Freddie Mac and Fannie Mae to work closely with private lenders to make affordable mortgage products more available and to increase funds so those in risky adjustable mortgages can refinance.

Starting in April 2007, Freddie Mac began to dedicate billions to buying refinanced mortgages designed to help troubled borrowers stay in their homes. Paulson would expand on initiatives like this.

Offering affordable mortgage products, through such agencies as the Federal Housing Administration (FHA), is part of Paulson's prescription. In August, President Bush announced a plan to make these loans available to more Americans.

FHA loans carry competitive interest rates, require little in the way of down payments and are popular with lenders because they are backed by the Federal Government. They are aimed at increasing home-buying opportunities for low- and moderate-income Americans.

Changes in laws and regulations on mortgage borrowing was also addressed by the Treasury head. He pointed out that the patchwork of rules governing state and federal institutions make regulation more difficult.

Looking forward, Paulson stressed the need for more transparency in mortgage lending. "We need simple, clear, and understandable mortgage disclosure," he said.

He pointed out the complexity of paperwork at closing, many of which are designed to shield lenders from liability rather than provide borrowers with useful information.

Paulson advocated for a single-page summary of the most critical facts that borrowers need to know, including actual interest rates and schedules of payments. To accomplish this, the Treasury Department is reviewing the Truth In Lending Act.

To improve integrity among mortgage originators, Paulson wants to establish nationwide licensing, education and monitoring systems for mortgage broker and loan officers.

That should also help combat predatory lending and Paulson wants regulators to assert more authority in defining and prohibiting unfair and deceptive practices. The rules would apply to the entire mortgage industry.

Paulson did not allow borrowers to escape without their share of blame. "Buying a home today is a complex process, but that in no way excuses home buyers from their obligation for due diligence."

Although the speech seemed to mark a step up in activism on the part of the Treasury Department, Paulson was quick to point out the limitations of the government's approach during the question and answer following the talk.

Referring to HopeNow, he said, "This is a 100 percent market-based solution. I believe in markets. The government is doing nothing here but facilitating people coming together."

Paulson also downplayed the possibility that the housing crisis could plunge the nation into recession. "I've seen turbulence in the market a number of times and I can't think of any situation where the backdrop of the global economy was as healthy as it is today," he said.