WASHINGTON Treasury Secretary Henry Paulson called Tuesday for an aggressive response to deal with an unfolding housing crisis that he said presents a significant risk to the economy.
In the administration's most detailed reaction to the steepest housing slump in 16 years, Paulson said that government and the financial industry should provide immediate help for homeowners trying to refinance current mortgages before they reset at much higher rates.
He also called for an overhaul of laws and regulations governing mortgage lending to halt abusive practices that contributed to the current crisis.
"Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy," Paulson said in a speech delivered at Georgetown University's law school. "The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."
Meanwhile, an index that tracks developers' expectations of future home sales fell this month to a new record low.
The National Association of Home Builders said Tuesday its housing market index, which tracks builders' perceptions of conditions and expectations for home sales over the next six months, fell two points to 18 in October, the lowest level since the index began in January 1985. It was the eighth straight monthly decline, suggesting price cuts haven't yet injected a spark into the slumping market.
Paulson, in his most somber assessment of the crisis to date, said that the housing correction is "not ending as quickly" as it had appeared it would and that "it now looks like it will continue to adversely impact our economy, our capital markets and many homeowners for some time yet."
Paulson spoke a day after officials from the nation's three biggest banks announced the creation of a fund with up to $100 billion in resources to buy troubled assets such as mortgage-backed securities.
Treasury Department officials participated in the behind-the-scenes discussions that led to creation of the fund, but no government resources have been pledged to the effort.
Paulson said that the government must balance the need to help homeowners stay in their homes against the threat that government action can encourage investors to make risky decisions in the future.
"I have no interest in bailing out lenders or property speculators." Paulson said. "(But) we must help as many able homeowners as possible stay in their homes."
But Paulson's plan to shore up asset-backed commercial paper is drawing criticism from free-market advocates, who say it risks shielding banks from the consequences of poor decisions.
"It is disappointing," said William Niskanen, chairman of the Cato Institute in Washington and a former member of President Ronald Reagan's Council of Economic Advisers. "It does go against the Bush administration's preferences. Like all bailouts, it creates a moral hazard problem. I'm unhappy with situations like these."