Treasury Secretary Paulson Outlines Mortgage Industry Policy Fixes

Treasury Secretary Henry Paulson spoke this morning in Washington to make recommendations about tightening the rules under which mortgages are originated, sold and securitized.Using prepared remarks, Paulson (pictured) outlined various steps devised by the President’s Working Group on Financial Markets, which emphasized structural changes to prevent the kinds of excess that led to the current credit crisis.”Although we haven’t yet worked completely through this period of market turmoil, and that is our highest priority today, it is not too early to suggest appropriate policy responses,” Paulson said. Included in the “policy responses” proposed by the Working Group are more state and federal oversight of mortgage originators, as well as national standards for mortgage brokers and revised rules for consumer protection and disclosure requirements.Paulson also called on major financial institutions to enhance their internal risk measurement and reporting systems. “[This] also means more comprehensive disclosure of fair value estimates for complex and illiquid instruments, and of credit or liquidity enhancements provided to off-balance sheet commitments, such as conduits and SIVs,” he said.The secretary also had some words for rating agencies, which have taken heat for their role in the subprime meltdown. “The credit rating process needs to clearly differentiate between structured products ratings and ratings for corporate and municipal securities,” he said. “And agencies should require securitized credit issuers to perform robust duediligence of originators of assets that are securitized or used as collateral for structured credit products.”Still, Paulson was careful not to load the blame for the economy’s credit woes on any one party. “This effort is not about finding excuses and scapegoats,” the secretary said. “Those who committed fraud or wrongdoing have contributed to the current problems; authorities need to and are prosecuting them. But poor judgment and poor market practices led to mistakes by all participants.”