Overhaul of mortgage rules sought

Treasury Secretary Henry M. Paulson Jr., warning that the nation’s housing crisis will continue to be a drag on the economy next year, for the first time called for national regulation of mortgage brokers and other strong federal rules to avert future housing busts.

In a speech yesterday at Georgetown University Law School, Mr. Paulson indicated that the administration was abandoning its previous piecemeal approach to remedying mortgage defaults and home foreclosures and said that a complete overhaul of mortgage regulation is needed.

“We also need to make some changes in our laws and rules in order to prevent some of the excesses and abuses of the last few years from happening again,” he said, adding that the changes must be crafted to avoid cutting off credit for homeowners while avoiding a “bailout” of housing speculators and investors.

His warning that the deep housing slump will continue to threaten economic growth echoed a similar assessment by Federal Reserve Chairman Ben S. Bernanke and comes at a time when a steep jump in oil prices has emerged as a big obstacle for the weakened economy. Worries about housing and energy contributed to a second day of losses on Wall Street yesterday.

Mr. Bernanke, in a Monday night speech to the Economic Club of New York, predicted that housing, which has cut the economy’s growth rate by nearly a percentage point in the past year, would continue to be a “significant drag” in coming months, exacerbated by the increased difficulty in obtaining jumbo and subprime mortgages since a credit crunch began in July.

Evidence of another leg down in the housing market emerged yesterday, with home-builder sentiment falling to a record low and the Mortgage Bankers Association predicting another 18 percent drop in mortgage originations next year.

Mr. Paulson, in the administration’s frankest assessment of the housing debacle to date, outlined how the housing downturn is weighing on the economy, with housing construction down by 40 percent and construction jobs down by 25 percent since early 2006. He said foreclosures among the one-fifth of U.S. home loans that are considered subprime have soared 200 percent since 2000 and will go still higher, while default and foreclosure rates are also surging among prime borrowers.

A separate report by the Government Accountability Office yesterday cited many of the same statistics and said that the foreclosure and default rates are the worst in a generation.

“The housing decline is still unfolding, and I view it as the most significant current risk to our economy,” Mr. Paulson said, while noting that the economy has remained remarkably resilient in the face of such a severe housing downturn. “The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth.”

Mr. Paulson said the Fed is leading an overhaul of mortgage regulations with a total revamp of its Truth in Lending rules to ensure consumers are fully informed about possible large jumps in their mortgage payments and other risks before they take out complicated subprime and exotic loans in the future.

“The most critical facts, including potential future monthly payments, should be on a single page in clear, easy-to-understand language, to be signed by the borrower and the lender. In my judgment, this may have prevented many of the problems that we are seeing today,” Mr. Paulson said.

The Fed also is taking the lead in drafting a national regulation barring unfair and deceptive lending practices that will apply to mortgage brokers nationwide.

Beyond that, Mr. Paulson said a national system of licensing is needed to prevent mortgage brokers from taking advantage of spotty state regulation to perpetrate frauds.

“Some of the conduct and practices that I have learned about are shameful,” he said. “Licensing requirements should take into account prior fraudulent or criminal activity. … At a minimum, mortgage originators should be able to demonstrate a sound understanding of the products that they will be selling.”

Mr. Paulson said the administration would present its regulatory program in full in January. His preview of the program yesterday came only a day after major banks announced a $100 billion bailout fund for mortgage investors established at the urging of Mr. Paulson as a way to ease the lingering credit crunch in the short-term funding market for mortgages.

Sen. Charles E. Schumer, New York Democrat, said the administration’s departure from its previous laissez-faire policies on mortgages has been too little, too late. “Every week, the administration moves closer to what many of us say is needed, but they do it so slowly, so haltingly, that they keep falling behind.”

But the administration is also meeting criticism from conservatives who question whether its cajoling of banks to bail out investors doesn’t amount to unwarranted government meddling in the market.