Paulson: Not contemplating 4.5% mortgage plan

WASHINGTON (MarketWatch) -- Treasury Secretary Henry Paulson said Tuesday that he isn't contemplating a plan to set a 4.5%-target mortgage rate for new home loans, though he acknowledged that the agency is working to lower mortgage rates.

"We didn't float any plan," Paulson told the CNBC cable channel. "I am always looking at new ideas and I have said from day one that the key thing to get us through this period is getting housing prices down."
Paulson responded to speculation that the Treasury would employ Fannie Mae (FNM, Trade ) and Freddie Mac (FRE, Trade ) to offer mortgages with rates as low as 4.5%. Instead of any 4.5% mortgage rate, Paulson expressed his support for the Federal Reserve's statement Tuesday that it would buy mortgage backed securities from Fannie Mae and Freddie Mac as a means of driving down mortgage rates.
"The Fannie Mae and Freddie Mac action is so critical," Paulson said.

Paulson defended the Treasury's controversial use of a $700 billion bank bailout fund authorized by Congress. Lawmakers were told the fund was needed for purchasing large quantities of mortgage backed securities, but instead he has allocated a significant amount of it to buy large minority stakes in financial institutions.
"Seeing what is it we've done to date is stop a string or cycle of financial institutional failures which could have gone to a downward spiral," Paulson said. "I am expecting no other major financial institution to fail."
Nevertheless, Paulson acknowledged that banks have not yet responded to the injections in the way he hoped they would by lending to consumers. "Everyone understands that they are not lending enough," Paulson said.
He also reiterated a plan to support consumer finance. Treasury announced Nov. 25 that it would use $20 billion of a the bank bailout fund to buy asset backed securities for a consumer-lending facility known as Term Asset-Backed Securities Loan Facility, or TALF.

The program, which isn't expected to start until January, is expected to provide liquidity to consumer loans such as student loans, credit cards debt and auto loans. It will be operated by the Federal Reserve.
"We at Treasury are willing to support consumer finance," Paulson said. "A lot of financing takes place outside of the banking system."