Proposed mortgage aid would do harm

By Karen Pierog CHICAGO (Reuters) - Plans for sweeping federal programs that would aid troubled mortgage borrowers would bring unfair relief to speculators and reward investors who made bad bets, U.S. Treasury Secretary Henry Paulson said on Thursday. “Most proposals I have seen would do more harm than good,” he said in a speech to the Economic Club of Chicago.

Several leading Democratic lawmakers in Washington have proposed multibillion-dollar programs that would help troubled borrowers stay in their homes. Paulson also had strong words of discouragement for homeowners who may be mulling whether to simply walk away from a home that has slipped in value. He said homeowners who could afford their mortgage should honor their obligations and that the Bush administration had no interest in bailing out housing speculators.

As for the economy, Paulson said he expected it to continue to grow this year, although he noted problems in the housing market continue to pose the biggest downside risk.

He fingered subprime mortgages as the catalyst for turmoil in the capital markets, which he compared to “a dry forest out there waiting for a match.” “We are working our way through this and there will be a policy response,” he said, adding that the response will deal with mortgage originators, securitization, rating agencies, disclosure and valuation issues. He added that while he has “great confidence” in the markets, a good number of them were not performing as they should.