TREASURY secretary Henry Paulson’s decision to not have the US government purchase troubled mortgage-related securities puts more pressure on housing lenders and investors to work out problem loans on their own.

Paulson’s support of a Federal Deposit Insurance Corporation (FDIC) pilot programme to systematically help troubled borrowers focuses more attention on FDIC chairperson Sheila Bair, who emerged as a leading figure to help resolve the housing crisis.

The outgoing Treasury secretary indicated that tax dollars should not be used to recast loans of borrowers facing foreclosure.

This was because the government would not be able to recoup its money, as is intended under the 700billion bailout passed last month.

Instead, with the government pumping capital directly into banks and other lenders, Paulson indicated those companies now have a responsibility to prevent foreclosures among their customers.

Following his point, government financial regulators on Wednesday stepped up pressure on lenders and other mortgage holders to adopt systematic and proactive programmes to modify problem loans.

“The agencies expect banking organisations to work with existing borrowers to avoid preventable foreclosures, which can be costly to both the organisations and to the communities they serve,” the regulators said.

“All banking organisations are expected to adhere to the principles in this statement.”

For example, the regulators said mortgage holders should lower loan costs to the point where homeowners can afford to pay for the life of the loan, and not just for a short period.

Housing activists criticised the move as a sellout of the millions of troubled borrowers trying to save their homes, while Wall Street plunged in the wake of the bailout shift. — © (2008) The New York Times News Service