'Marketplace' Report: Addressing the Housing Slump Treasury Secretary Henry Paulson warns that the U.S. housing slump poses significant risks to the economy and is calling for aggressive government action, including help for homeowners.

'Marketplace' Report: Addressing the Housing Slump

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ALEX CHADWICK, host:

From NPR News, it's DAY TO DAY.

The secretary of the U.S. Treasury, Henry Paulson, today issued a warning about the housing bust. He says this is the biggest risk the economy is facing and the government needs to respond. Mr. Paulson spoke today at Georgetown University's Law School.

John Dimsdale is across town at MARKETPLACE's Washington headquarters.

John, treasury secretary sounded pretty dire today.

JOHN DIMSDALE: Yeah. He said the country is in the midst of the most serious housing slump in at least 16 years. You know, hundreds of thousands of these adjustable mortgages are in the process of being recalibrated, which is creating higher monthly payments that homeowners can't afford and it's causing a wave of foreclosures.

So the secretary's concern is that this is going to spread into credit markets, even beyond subprime mortgage lending and they'll be afraid to make new loans which would make capital for all sorts of investments a lot harder to come by.

CHADWICK: Well, okay. They are getting increasingly concerned but they haven't been that concerned about it up until pretty recently.

DIMSDALE: You're right. Secretary Paulson said today that the housing correction is not ending as quickly as it appeared it would late last year. And even just a couple of moths ago, he seemed a lot less concerned when he said the economy is going to work through this problem just fine.

But the ripples from these bad loans are hitting on two levels. Financial markets that invested in the subprime mortgages have lost a lot of money, and then there's the street level concern about foreclosures putting families on the street, harming neighborhoods with all sorts of abandoned houses. So the tone really has changed recently.

The treasury secretary yesterday helped put together a deal between major banks to set up a hundred billion dollar fund to prop up the value of these investment securities that have the mortgage loans. If those investments were to drop precipitously, there could be a huge credit crunch where no one from hedge funds to money market funds would be willing to lend money. And that would make a recession much more likely.

CHADWICK: So he is taking action. He also suggests that the government should do something. What does he want it to do, and since he is treasury secretary, can he just order it done?

DIMSDALE: Well, some things would require Congress - congressional approval. He's looking for government incentives for banks or lenders to renegotiate the bad loans. The economy already gives lenders some incentive to keep people in their homes because banks don't want to deal with abandoned properties, especially if their value is declining. So it shouldn't take too much government prodding to get lenders to work with homeowners.

But Paulson's also calling for a regulatory crackdown on mortgage brokers. Were they predatory lenders selling low-income people mortgages that they couldn't keep up with? Paulson is saying that there should be a national licensing of mortgage lenders and some sort of government monitoring of their activities.

CHADWICK: John Dimsdale on remarks today by Treasury Secretary Henry Paulson. John joins us from public radio's daily business show MARKETPLACE, produced by American Public Media.

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