Paulson Plans to Step Up Relief for Homeowners, Buy Mortgages

By Rebecca Christie and Robert Schmidt

Oct. 22 (Bloomberg) -- Treasury Secretary Henry Paulson aims to intensify efforts to stem record mortgage foreclosures, using part of the government's $700 billion financial-rescue fund to purchase home loans.

``There still are a disturbing number of foreclosures where people are walking away from their mortgages,'' Paulson said in an interview with PBS television's Charlie Rose in New York yesterday. Buying mortgages and related securities will give officials ``more leverage'' to modify loans, he said after a speech later in the day.

Paulson is coming under increasing political pressure to help millions of Americans struggling with mortgage debt amid the worst housing slump in at least a quarter century. Most of the action taken by the Treasury since Congress passed the bailout bill has focused on stabilizing the banking system and unfreezing credit markets.

``It has done virtually nothing to help stabilize the root of the economic crisis our country is suffering, and that's the housing market,'' Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., said in an interview, referring to the Treasury's rescue program.

While some housing figures showed signs of stabilization in the middle of the year, the freeze in credit markets threatens to deepen the industry's slump, throwing more Americans out of their homes. Federal Reserve Chairman Ben S. Bernanke said this month even households with ``good credit'' are finding it tough to get mortgages.

Foreclosures Climb

Owners of 303,879 properties, or one in 416 U.S. households, got a default notice, were warned of a pending auction or were foreclosed on in August, Irvine, California based RealtyTrac Inc. data show.

``I'm getting anxious about the lack of attention'' on homeowners, Democratic Representative Maxine Waters of California, who chairs the House Financial Services housing subcommittee, said in an interview.

Waters and House Financial Services Chairman Barney Frank, a Massachusetts Democrat, asked President George W. Bush this week to name Federal Deposit Insurance Corp. Chairman Sheila Bair to lead an effort to reduce foreclosures.

Bair's agency, which is running a successor to failed lender IndyMac Bancorp Inc., has mailed foreclosure-prevention offers to more than 7,400 borrowers under a program designed to be a model for the industry to modify loans.

Paulson's Talks

Paulson said he consulted with Bair and Bernanke in the past two days and will also speak with Herbert Allison, the chief executive officer of Fannie Mae, the largest purchaser of U.S. mortgages, which was seized last month by the government.

``We need to do everything we can to minimize'' the millions of likely additional foreclosures, Paulson said in the interview yesterday.

The $700 billion rescue package gave the Treasury authority to buy individual mortgage loans. A government official told reporters two days ago that once the Treasury hires an asset manager for the so-called whole-loan purchases, that firm will be able to work with homeowners on easing their payment terms.

Paulson also said he's not opposed to a second fiscal stimulus this year. Still, he said his focus is on the efforts by the Treasury and Fed to stabilize the financial system. There's more ``bang for the buck'' in the rescue plans than in another stimulus, he said.

CEO Gathering

While in New York yesterday, the Treasury chief visited the New York Stock Exchange and met with a group of chief executives to explain his efforts and get an update on the state of the economy. CEOs from companies including General Mills Inc., The Walt Disney Co. and Burlington Northern Santa Fe Corp., and pension-fund executives, attended.

Asked about potential aid for General Motors Corp., the automaker that has lost 74 percent of its market value this year, Paulson said the best way to help companies is to stabilize credit markets. He declined to ``speculate'' about the future of GM.

``General Motors is an important company; we have a number of very important companies,'' which are being affected by the credit crisis, Paulson said. ``This is something Congress is focused on.''

The Treasury secretary advocated mergers and acquisitions to strengthen the banking industry, while reiterating that the aim of his $250 billion bank recapitalization plan is to stimulate lending. Paulson said last week he will put $125 billion in nine large banks, including JPMorgan Chase & Co. and Citigroup Inc., with the rest going to an array of other financial companies.

Bank Mergers

``There will be some situations where it's best for the economy and for the banking system for there to be a consolidation,'' Paulson said. Still, the Treasury is ``not going to use this money to prop up failing banks,'' he added.

Paulson cited Wells Fargo & Co.'s planned acquisition of Wachovia Corp. as a combination that's a ``very good thing for the system.''

Even with a stabilization of credit markets, the Treasury chief indicated the economy may be in a slump into next year.

``We've got some challenging months ahead in terms of the impact of the credit crunch,'' Paulson said in the Charlie Rose interview. ``Whenever you do the things we've done, there are also some distortions and some dislocations in terms of other parts of the financial system and other parts of the economy.''

To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net.