U.S. Treasury Secretary Henry Paulson said he is pleased Freddie Mac and Fannie Mae are committed to raising more capital this spring, calling reform of the government-sponsored enterprises the best way to combat foreclosures.

Paulson said foreclosures will hit 2.5 million in 2008, compared with 1.5 million in 2007 and 800k in 2004 when the economy is strong. He said public policy should not be expected to prevent all of these foreclosures, as policy cannot and should not compensate for poor financial decisions and speculative purchases.

As for the preventable foreclosures, he said GSE reform is the biggest step congress can make to assist in the necessary correction.



"Fresh capital will strengthen their balance sheets and allow them to provide additional mortgage capital, as they balance their responsibilities to their mission and to their shareholders during this period of housing market adjustment," he said at the FDIC's forum on mortgage lending in Arlington, Virginia on Tuesday.

Paulson said the "inevitable" correction process is well under way, noting that the overhang of supply for single-family unit housing down 21% since the peak in 2006. "Another sign that we are well into the adjustment process is that existing home sales appear to have flattened over the past several months, indicating that demand may be stabilizing," he said.

He said foreclosures may continue for some time, but that the Hope Now Alliance is making progress to ward off preventable foreclosures, which does not include purchases made from speculators for a quick profit.

By Patrick McGee and edited by Sarah Sussman