Washington is still buzzing over Treasury Secretary Henry Paulson's blunt, tough-love comments about the home foreclosure crisis and the real estate market last week.

His core message: Foreclosures are a fact of life in the mortgage world. They happen in large numbers even when the economy is booming. They're especially high now because a lot of people messed up - home buyers as well as lenders. In the wake of those messes, the federal government's clean-up role can only be a limited one.

In a speech to an FDIC housing conference, Paulson said many of the thousands of foreclosures now getting attention from consumer advocates and Congress were triggered by "life events," such as losses of jobs, illness, and divorce.

Even in the highest-flying year of the housing boom, 2004, eight hundred thousand Americans lost their homes to foreclosure. Though filings are up substantially since then, said Paulson, "many of today's foreclosures (were) not preventable" by the federal regulators who are now being asked to bail them out.

Compounding the situation during the boom were "lax credit and underwriting standards" -- funny-money stated-income loans, zero-equity and negative amortization -- that permitted large numbers of consumers to take on mortgages "they can't possibly afford and they will (eventually) lose their homes" no matter what.

"There is little (that) public policy makers can, or should, do to compensate for untenable financial decisions" by home buyers looking for quick profits and willing to take on unreasonable debts, said Paulson.

The Treasury secretary's comments came on the eve of Senate action on a housing-relief bill that would provide refinancing opportunities to a fraction of financially-distressed homeowners now stuck with bad mortgages. Everybody else will be left to either work out loan modification terms with lenders or end up in foreclosure.

Paulson also used his speech to punch holes in the widely-accepted perception -- fostered by media coverage -- that the housing market is in deep trouble nationwide.

"We need to recognize that there is not a national housing market," he said, "but a collection of regional," highly-localized sub-markets down to the neighborhood level that often perform starkly different than the national headlines might suggest.

Though news about high foreclosure rates on a national basis may be scary-sounding, the fact is that the housing bust is highly concentrated geographically.

For example, said Paulson, just four states: California, Florida, Arizona and Nevada -- accounted for one quarter of all mortgages nationwide, but 42 percent of foreclosure filings last quarter. Adding in Michigan, Indiana and Ohio, these seven states -- all by themselves -- have accounted for over half of all foreclosure filings this year.

Published: July 14, 2008

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.