WASHINGTON -- The Bush administration is working to combat the United State's severe housing crisis but there is no simple solution, Treasury Secretary Henry Paulson said yesterday, adding that a correction in the housing market is "inevitable and necessary."
Mr. Paulson said the country was facing an unprecedented wave of 1.8 million subprime mortgages that are scheduled to reset to sharply higher rates over the next two years. He said this raised the threat of a market failure and was the reason the administration brokered a deal with the mortgage industry to freeze certain subprime mortgage rates for five years to allow the housing market to recover.
"By preventing avoidable foreclosures, we will safeguard neighbourhoods and communities and fulfill our responsibility of protecting the broader U.S. economy," Mr. Paulson said in a speech in New York. "However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years."
In his speech, Mr. Paulson raised the possibility that some sort of "systematic approach" may need to be developed to help homeowners with other types of adjustable-rate mortgages that are resetting to higher rates. The current plan only involves subprime mortgages, loans offered to borrowers with weak credit histories.
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The steep slump in housing has been a serious drag on the overall U.S. economy. There are rising fears that the country could topple into a recession. Those worries were heightened after a report Friday showing that the unemployment rate jumped to a two-year high of 5 per cent in December with job growth slowing to a crawl.
Mr. Paulson called the current housing correction inevitable after what occurred during the five-year boom in which sales and prices climbed to record levels.
"After years of unsustainable price appreciation and lax lending practices, a housing correction is inevitable and necessary," Mr. Paulson said.
He said that the correction was taking a toll on the economy that would continue for a period of months.
"It will take additional time for markets to regain confidence," Paulson said. "The overhang of unsold homes will contribute to a prolonged adjustment and poses by far the biggest downside risk."
Mr. Paulson and U.S. President George W. Bush both delivered speeches yesterday declaring the economy is fundamentally sound.
The administration is considering an economic stimulus package that might include tax cuts to ward off a recession. Mr. Bush is expected to unveil the package, if he decides to go ahead with it, around the time of the Jan. 28 state of the union address.
Asked about a stimulus package, Mr. Paulson said yesterday that Mr. Bush has not made any decisions yet but that the administration was very much focused on the issue.
"This is a decision the president still has to make. When he makes it, we will report to all of you," Mr. Paulson said during a question-and-answer session after his speech.
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