Paulson Says Treasury `Flexible' on Housing Measures
By John Brinsley and Peter Cook
Treasury Secretary Henry Paulson indicated the Bush administration is willing to consider congressional plans to stem foreclosures by expanding government guarantees for mortgages.
``I think you will continue to see flexibility as we learn and go forward,'' Paulson said in an interview with Bloomberg Television in Beijing. He spoke after meetings with Chinese President Hu Jintao and Vice Premier Wang Qishan, and praised them for making ``very material progress'' in allowing China's currency to appreciate.
Paulson's housing comments are a shift from last month, when he said proposals to use government funds were a ``non- starter'' and played down concern about homeowners whose houses are worth less than what they owe on their mortgages. House Financial Services Committee Chairman Barney Frank said yesterday that officials are warming to his plan to widen mortgage guarantees.
Foreclosures jumped 60 percent last month after reaching a record rate in the fourth quarter of 2007. Rising defaults on subprime mortgages have roiled global financial markets and worsened the housing slump in the U.S., threatening the first contraction in the economy since 2001. Federal Reserve Chairman Ben S. Bernanke said today the economy may contract in the first half of the year, and that a recession is possible.
The International Monetary Fund today cut its forecast for global growth this year and said there's a 25 percent chance of a world recession, citing the worst financial crisis in the U.S. since the Great Depression.
Paulson said he told Chinese officials that the U.S. economy is having ``a very difficult quarter'' and has ``slowed down sharply.'' Still, he added that the IMF report ``sounds a little overblown to me.''
Frank and Senate Banking Committee Chairman Christopher Dodd last month announced plans to have the Federal Housing Administration insure refinanced mortgages after lenders cut loan balances for certain borrowers.
Federal Reserve Chairman Ben S. Bernanke, who testifies at a congressional panel today, has urged lenders to forgive portions of mortgages for borrowers whose home values have declined.
Paulson said today that ``the FHA is looking for ways to have more flexible solutions, to work with those homeowners who want to stay in their homes and are underwater in their mortgages and are committed to doing what it takes to keep their homes.''
The Treasury chief in a March 3 interview with Bloomberg Television said that ``almost too much'' had been made of homeowners with so-called negative equity.
Credit-market turmoil poses the most severe crisis for banks in 30 years, Morgan Stanley and Oliver Wyman said in a joint report this week. UBS AG said it will write down another $19 billion in mortgage-related assets, and Deutsche Bank AG reported another $3.9 billion of markdowns.
Banks and securities firms worldwide have reported about $232 billion in credit losses and writedowns since the beginning of 2007, Bloomberg data show.
Before the interview, Paulson told reporters that he expressed U.S. concerns over China's crackdown on protesters in Tibet in his meetings today. China, which hosts the Olympics in August, blames the exiled Dalai Lama for instigating the biggest protests in Tibet and neighboring provinces in almost 20 years.
``I expressed our concerns about the violence, and urged a peaceful resolution through dialogue,'' he said.
He also said that while he continues to urge China to liberalize its capital markets, he's sure that financial turmoil in the U.S. is making Chinese officials reluctant to proceed too quickly.
``There's no doubt that what is happening in the U.S. markets is clearly giving the Chinese pause,'' he said. ``They may be too polite to say so.'' Still, he argues China must work to make their capital markets more ``effective and efficient.''
The visit to China is Paulson's sixth since becoming Treasury secretary. He's pushing the world's fastest-growing major economy to open its financial markets and let its currency appreciate more quickly.
Paulson praised China for the faster pace of the yuan's gains. The currency has advanced more than 5 percent versus the dollar since the Treasury chief's visit to China in December for Strategic Economic Dialogue talks, and is up 18 percent since the Chinese abandoned a strict peg in July 2005.
U.S. and European officials have pressed China to accelerate gains in the yuan to offset lopsided trade flows between the nations. They also say increases would help to tame inflation, at an 11-year high in China.