Paulson Dons His Cape

The Treasury secretary and mortgage industry hope to avoid 'preventable' foreclosures.
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Updated from 11:55 a.m. EST

Treasury Secretary Henry Paulson on Monday acknowledged a government-led plan to help subprime borrowers avoid foreclosure.

Paulson, in a scheduled presentation at the National Housing Forum in Washington, D.C., said the Treasury is working on a "three-point plan" to "avoid preventable foreclosures" and to "minimize the impact" of the housing downturn on the U.S. economy.

"As we are all aware the housing and mortgage markets are working through a period of turmoil, as are other credit markets, as risk is being reassessed and repriced," Paulson said at the forum, hosted by the Office of Thrift Supervision. "The number of subprime mortgage resets is going to increase dramatically next year, and we need to make sure the capacity is there to handle it," he said.

Paulson said the plans under discussion with executives within the mortgage industry do not -- and will not -- include government-sponsored subsidies to lenders or borrowers.

"First we are increasing efforts to reach able homeowners who are struggling with their mortgages," he said. "Second we are working to increase the availability of affordable mortgage solutions for these borrowers. Third, we are leading the industry to develop a systematic means of efficiently moving able homeowners into sustainable mortgages."

Shares of the large mortgage lenders, including

Countrywide Financial

(CFC)

,

Washington Mutual

(WM) - Get Report

,

Wells Fargo

(WFC) - Get Report

and

Citigroup

(C) - Get Report

, were falling after Paulson's speech. Most of the stocks had jumped on Friday, following a report in the

Wall Street Journal

of the plan to freeze some rates.

The companies, among others, have had their fair share of troubles as the mortgage crisis deepened. Countrywide dipped almost 9% Monday before recovering, while the more diversified banks were more recently trading flat.

The selloff in Countrywide's stock came after CEO Angelo Mozilo expressed a more optimistic outlook about the troubled Calabasas, Calif.-based company,

but declined to comment on the safety of the company's dividend or the possibility for further writedowns.

Last week the

Wall Street Journal

reported that regulators and mortgage industry executives were close to an agreement that would extend the teaser rates on some subprime mortgages that promoted low interest rates for the first two to three years, but then reset to much higher fixed rates for the majority of the life of the loan.

Subprime mortgage borrowers -- those who have shaky credit histories or obtained a loan with little or no documentation -- began having problems this year as home prices began falling and the availability of credit tightened.

Borrowers have been increasingly defaulting on their mortgage payments this year, as the resets began, because the higher rates typically increase mortgage payments by several hundred dollars a month, leaving many borrowers overextended. Foreclosures have also been rising as borrowers are unable to refinance the loans to lower interest rates.

Paulson identified four categories of subprime borrowers -- those who can afford their adjustable rate mortgage; those who cannot afford the lower teaser rate and will likely not be able to keep their homes; those homeowners that might choose to refinance their mortgage; and those with "steady incomes, relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate."

It is this fourth category that the Treasury is targeting to modify their mortgages.

"The third element of our plan involves a pragmatic response to the reality that the number of homeowners struggling with their resetting subprime mortgage will increase throughout 2008," Paulson said. "As the volume increase, we will need an aggressive, systematic approach to fast-track able borrowers into a refinance or mortgage modification. This third element does not, and will not, include spending taxpayer money on funding subsidies for industry participants or homeowners."

The Treasury is also proposing a plan to allow state and local governments to "temporarily broaden their tax-exempt bond programs to include mortgage refinancings."

Mozilo, who was also a panelist at the Housing Forum, also wants the government-sponsored enterprises --

Fannie Mae

and

Freddie Mac

-- to take a more active role in the mortgage crisis.

"I don't think there's a conflict between being safe and sound and playing a greater role in this marketplace," Mozilo said according to

Bloomberg

. "I think it's very important for Fannie Mae and Freddie Mac to step up. It's the only way out of this to shorten the cycle. Otherwise it's going to be very painful."

Shares of Fannie and Freddie fell between 4% and 5% on Monday.

Fannie Mae CEO Daniel Mudd said during a separate panel discussion at the Forum that the mortgage financing company had eased terms on around $10 billion of subprime loans, according to

Reuters

.

Mudd also said that he supported the Treasury's proposal to avoid home foreclosures.

"We're supportive," Mudd said, according to

Reuters

. "But everybody needs to play a role in this."