"Foreclosures are very costly to lenders and investors as well as harmful to homeowners," Paulson said in an interview on Fox News Channel. "There's no bailout with government money, none whatsoever."
Earlier this month, Paulson unveiled a proposal that would temporarily freeze low introductory, or "teaser," rates on subprime mortgage loans for five years so that some borrowers would not face the loss of their homes when the loans reset at higher rates.
But the Bush administration proposal has met skepticism, with critics warning it may make some lenders wary about future lending because they see the government stepping in to change terms. Others say people should bear the consequences of their bad decisions.
At a meeting with about 200 community members, including bankers, housing counselors and activists, Paulson defended Treasury's role in helping broker the mortgage relief plan by saying that it was only intended to bring market participants together, not to interfere with normal market processes.
"The role of government is to prevent a market failure," Paulson said. "We don't want to do things that would cut off funds (from lenders) in the future."
Kansas City was the second stop in a coast-to-coast swing Paulson is undertaking this week to discuss the program. He later traveled to Stockton, California on Tuesday to address homeowners and real estate professionals alongside Gov. Arnold Schwarzenegger.
Stockton, about 80 miles east of San Francisco, had the highest foreclosure rate of any U.S. metropolitan area in the third quarter, with one foreclosure filing for every 31 households in the three-month period, according to RealtyTrac Inc.
Both Paulson and Schwarzenegger acknowledged that the mortgage modification program would not help all of those who are facing unaffordable rate resets, particularly those who have already missed payments and may be facing foreclosure.
Focusing on those whose loans can be modified would "take out a big chunk of the problems," Schwarzenegger said.
"We can't help everybody, but we can help most of the people that really need the help," the governor said.
NEW FED RULES
In a move to avoid a repeat of the loose lending standards that have put many American homeowners at risk of losing their homes, the Federal Reserve Board on Tuesday proposed new protections for subprime borrowers
Under the proposal, U.S. lenders would have to determine borrowers can afford a mortgage before making the loan. In addition, borrowers will get details on their brokers' compensation and be billed monthly for annual charges like property tax and insurance.
The U.S. House of Representatives also passed legislation on Tuesday that would for three years erase the tax bill that many homeowners would face as they struggle with burdensome home loan payments.
Under the legislation, debt that was forgiven in a foreclosure or as part of a loan workout will not be classified as income.
Paulson told Fox that a wave of interest-rate resets coming in the next two years required action, but unlike in the past, it was more difficult for lenders and mortgage holders to negotiate new loan terms, since many mortgages have been split up and sold as securities around the world.
"So what the industry has done is come up with some streamlined procedures to fast-track these modifications to approximate what would have happened under normal market conditions if there was more time," he said.
Addressing the community forum, Paulson described the weak housing sector as the biggest single risk to the national economy now, but he added: "We think and believe we are going to continue to grow."
"Rampant appreciation" in housing markets had created conditions for the current housing slump, Paulson said. "This downturn was inevitable."
(Additional reporting by David Lawder in Stockton; editing by Gary Crosse)
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