WASHINGTON — Treasury Secretary Henry Paulson called Tuesday for tougher mortgage standards, including uniform national licensing of brokers, but he left unclear whether he was prepared to support legislation to overhaul lending standards.
Though he offered few specifics on policy recommendations, Mr. Paulson said in a speech at the Georgetown University Law Center that the current system clearly was not working. “We … 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 also painted a gloomy outlook for the mortgage market, noting foreclosure figures and the number of subprime loans whose interest rates are expected to reset. He called the housing market the “most significant current risk to our economy” and said it is unfolding worse than he expected.
“The ongoing housing correction is not ending as quickly as it might have appeared late last year,” Mr. Paulson said. “And it now looks like it will continue to adversely impact our economy, our capital markets, and many homeowners for some time yet.”
Brian Gardner, an analyst at KBW Inc.’s Keefe, Bruyette & Woods Inc, said Mr. Paulson’s speech seemed to signal that the Treasury Department is increasingly concerned about the mortgage crisis.
“It just struck me at a gut level that they are growing more worried about the subprime situation and how this is going to play out over the next few years,” he said.
Mr. Paulson gave a laundry list of areas that he said needed to be addressed, including disclosure, origination, predatory lending, and liability. But he left it unclear whether he was open to accepting legislation or whether he felt more regulation could solve the problem.
He cited the fragmented system of federal laws and varying state regulation and authority. “This patchwork structure should be streamlined and modernized.”
Mr. Paulson also singled out brokers, noting that they are regulated only at the state level. There needs to be a “national approach” to the regulation of brokers, he said, and policymakers should consider creating a uniform licensing, education, and monitoring system. Any licensing requirement should require ongoing education and should take into account prior fraudulent or criminal activity, he said.
Mr. Paulson also called on the Federal Reserve Board to do more by injecting more uniformity and objective standards into the mortgage process. The Fed is working on a rule to curb abusive mortgage lending under the Home Ownership and Equity Protection Act.
Mr. Paulson also noted that several bills pending in Congress would attempt to ban certain subprime mortgage practices, including prepayment penalties or stated-income loans. But he warned that there are circumstances in which these products would be appropriate. “We need to strike a careful balance of providing adequate consumer protection without limiting overall credit availability or consumer choice, especially for those who most need that flexibility,” he said.
Mr. Paulson, the former chief executive officer of Goldman Sachs Group Inc., also said he would not support assignee liability on securitizers and investors, which he said would generate unintended consequences. House Financial Services Committee Chairman Barney Frank, D-Mass., is close to introducing a bill that is expected to include some limited assignee liability — a concept the banking industry opposes.
Democratic lawmakers sounded unimpressed with Mr. Paulson’s speech. “Secretary Paulson sounded a lot like Democrat Light in the plan he proposes to address the subprime mortgage crisis, but he is still taking baby steps when larger steps are required,” Sen. Charles Schumer, D-N.Y., said in a conference call with reporters. “Every week the administration moves closer to what many of us have been saying is needed, but they do it so slowly, so haltingly, that they keep falling behind.”
The worsening of the credit crisis “is forcing them inexorably to do more, but I just wish they would get ahead of the problem rather than lag behind,” he said.
