Paulson says U.S. home foreclosures to stay high

ARLINGTON, Va (Reuters) - U.S. Treasury Secretary Henry Paulson said on Tuesday that home foreclosure starts may hit 2.5 million this year, many of them the borrowers' own fault for taking out loans they couldn't afford.

"There is little public policy-makers can, or should, do to compensate for untenable financial decisions," Paulson told a forum on mortgage lending to low and medium-income homeowners.

He said flatter sales of existing homes in recent months implied some stabilizing in home-buying demand but warned foreclosures stemming from a housing correction that began in 2006 likely will continue for some time.

Paulson said that Treasury is continuing its efforts to assist "preventable foreclosures," chiefly among low- and moderate-income people who fell behind on payments when their variable-rate loans reset at higher rates.

Since last July, about 1.7 million homeowners have completed loan workouts that have allowed them to stay in their homes, Paulson said.

He urged Congress to speed up its efforts on a reform bill governing the activities of government-sponsored enterprises Fannie Mae and Freddie Mac , which he said played vital roles in providing mortgage financing. In particular, the GSEs need a strong regulator to make sure they operate on safe and sound principles, Paulson said.

He said that since the housing correction began, the market for subprime loans -- typically made to borrowers with limited or spotty credit histories -- has virtually disappeared.

"We must not lose the benefits of the subprime market as we eliminate its flaws," Paulson said.

He said Treasury was working with other regulators to see whether covered bonds that provide funds through secured debt instruments backed by a pool of residential mortgage loans might be a viable way to increase mortgage funding

(Reporting by Glenn Somerville; Editing by James Dalgleish)

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