MercoPress. South Atlantic News Agency

US mortgage defaults to worsen in 2008, warns Paulson

Paulson call on lenders to offer new terms to avert an “economic calamity”

United States Treasury secretary Henry Paulson said mortgage defaults will worsen in 2008 and lenders should act “aggressively” to offer new loan terms to avert an economic calamity, the Wall Street Journal online said.

In the interview with the WSJ Paulson said mortgage lenders should quickly set up new loan programs for homeowners facing higher payments, adding that a case-by-case evaluation would not be enough to avoid a wave of defaults. The Treasury chief said he expects more mortgage failures in 2008 because of the high number of looming "resets" on adjustable-rate loans that were given with little verification during the housing boom. Paulson, who so far had encouraged lenders to work with borrowers on an individual basis, said his outlook has evolved as he has learned more about the scope of the problem. "The nature of the problem will be significantly bigger next year because 2006 (mortgages) had lower underwriting standards, no amortization and no down payments" he told the WSJ. "We're never going to be able to process the number of workouts and modifications that are going to be necessary doing it just sort of one-off... I think most of the (banks) we've talked to agree with that -- this is just encouraging them, aggressively encouraging them, to move quicker". Economists have been warning of a wave of defaults that will hit as many as 2 million US homeowners and lead to massive losses for the banking and finance sector that could damage the overall economy. Paulson said Congress must play a role in alleviating the crisis alongside government-sponsored mortgage giants Fannie Mae and Freddie Mac. "I see this as being important to the individual homeowners and I start there but it's got a macroeconomic effect, it's got a neighborhood effect and it's clearly got a capital markets effect,' he said. Paulson said Congress should temporarily allow Fannie and Freddie to purchase mortgages larger than their current limit of 417.000 US dollars, a move some believe would improve the availability of so-called jumbo mortgages. The Mortgage Bankers Association said mortgage application volume fell 3.6% last week. Meantime Freddie Mac, which reported a 2 billion US dollars quarter loss Tuesday and saw shares plummet nearly 29%, declined another 9% early Wednesday after an analyst downgrade. Freddie's counterpart Fannie Mae also dropped for a second straight day, as did Countrywide Financial Corp., the US largest mortgage lender.