In an appeal to the mortgage industry amid a steep housing market downturn, U.S. Treasury secretary Henry Paulson urged mortgage investors and servicers to unite and stage an 'early intervention' to keep borrowers from losing their homes.

"Recent surveys have shown that as many as 50 percent of the borrowers who have gone into foreclosure never had a prior discussion with a mortgage counselor or their servicer. That must change," Paulson said in a speech at Georgetown University's Law Center in Washington on Tuesday according to prepared remarks.

"Early intervention is critical – the earlier borrowers explore alternative options, the more likely they will find a workable solution and keep their home."

The mortgage industry is in the midst of a big decline after eight years of rising prices attracted investors and individuals to buy more homes. Demand and prices have recently been flat or falling and an increasing number of owners have been defaulting on their loans.

"Homebuilders responded to the extraordinary demand for more and larger homes as if it would last forever," Paulson said.

Paulson noted that from 1998 to 2007, lending to borrowers with poor credit, so-called 'subprime' borrowers grew from 2 percent of all mortgages in 1998 to 14 percent in mid-2007. However he added that the problem has extended into borrowers with good credit in the 'prime' market, making the problem more complex.


A "critical piece of the solution" to the subprime problem is a new alliance of mortgage companies, counselors and investors called "Hope Now," which aims to help the various parties come to a solution for the crisis. Paulson, who is President Bush's top adviser and spokesperson for economics, announced the formation of the private sector group last week.

"You have an obligation to help meet this challenge, and you can do so more effectively as part of an integrated effort," he said, noting that the alliance would generate ways to evaluate and measure the performance of mortgage servicers.

"The current process is not working well. This is not about finger pointing; it is about putting an aggressive plan together and moving forward. This alliance is dedicated to seeing that happen, and I expect to see results."

Paulson urged lawmakers in Washington to pass legal reforms to expand government loan services and temporarily eliminate taxes on owners' primary homes.

The treasury department is also preparing a proposal for a 'complete overhaul' of the financial regulatory structure to be presented early next year he said, but added that the reforms would take years.

"Homeowners should not wait years - we need to move now to make interim improvements to our current mortgage regulatory system," he said.

Economic Impact

Paulson said that the current downturn in the housing market "will continue to adversely impact our economy, our capital markets, and many homeowners for some time yet."

"But 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," he said.

He noted that the number of new homes being built has fallen off more than 40 percent since a peak of 2.3 million units in 2006 and that the number of residential building jobs has fallen by nearly 200,00 since that time and may continue to drop.

As Congress makes efforts to find legal solutions to the problem, securitizers and investors should not be burdened with additional liability, he said.

"It would potentially paralyze securitization, a process that has been extremely valuable in extending the availability of credit to millions of homeowners nationwide and lowering the cost of financing. Again, balance is critically important. Congress should proceed with extreme caution so as to avoid cutting off investment inflows to the housing market."