Pushing back against Federal Reserve Chairman Ben Bernanke's call for a 'vigorous response' to the housing crisis from both public and private sectors, Mr Paulson told US lawmakers that he remains focused on private-sector efforts to modify loans.

'As a matter of property rights in contract, I don't like the idea of retroactively changing contracts and I'm concerned with what it might do for financing availability going forward,' Mr Paulson said in response to questions at a Senate appropriations subcommittee.

Some Democrats in the US Senate last week proposed to curb rising home foreclosures by modifying bankruptcy laws to allow judges to amend mortgage contracts to wipe out some mortgage debt in court. Another Senate plan calls for the government to buy up distressed mortgages to prevent foreclosures.

The latter may be a key component of a bill to be unveiled next week by House of Representatives Democrats to tackle what House Financial Services Committee Chairman Barney Frank called the worst housing slump since the Great Depression of the 1930s.

Mr Paulson said the current situation does not warrant such drastic measures.

'We're looking at a lot of ideas, I don't think that's a good idea. I think that idea does a lot more harm than good,' Mr Paulson told a House appropriations subcommittee earlier on Wednesday. Something like that was done at the time of the Depression. Then foreclosures were 50 per cent, now they're 2 per cent.'

Keep hope alive
The US Treasury chief stressed that there already were government programs to support housing such as the Federal Housing Administration and government-sponsored housing finance enterprises.

He said he was far more in favour of the Treasury-backed 'Hope Now' efforts by mortgage lenders and servicers to try to voluntarily renegotiate terms that enable borrowers to keep up their payments.

'I am emphasising a program that says if you're a homeowner and you want to stay in your home and you can afford to stay in your home, raise your hand, call or reach out to someone,' Mr Paulson said.

Mr Bernanke in a speech on Tuesday suggested that reducing the principal that borrowers owe to restore some equity for them would be a more effective means of avoiding delinquency and foreclosure than cutting interest rates on troubled loans.

Mr Paulson suggested that this could be 'one of the tools' used by lenders to modify loan terms, but added it should not be mandated by bankruptcy court judgements or done at taxpayer expense.

Illinois Senator Richard Durbin, a Democrat who had backed the plan to alter bankruptcy laws, said it would provide a strong incentive for lenders to alter loan terms voluntarily. He questioned the need to preserve the sanctity of contracts for many risky subprime mortgages that have brought marginal borrowers to the brink of financial ruin.

'There's nothing holy about how these contracts were entered into. Many of them were deception at its worst. People were taken advantage of,' Mr Durbin said.

The bankruptcy proposal was blocked by Senate Republicans but may resurface with amendments, lawmakers have said.

Economy still seen growing
In the hearings, Mr Paulson stood by his assertion that the US economy would likely continue to grow, but he cautioned that the risks are to the downside.

'We have an economy that's grown for six years ... I believe it's going to continue to grow this year,' he told the House Appropriations Financial Services Subcommittee.

'We recognise that the risks are to the downside and that's why we moved as quickly as we did with the help of Congress to put in place a stimulus package,' Mr Paulson said, adding that US financial institutions are fundamentally healthy but should raise capital if they need to.

Even so, he cautioned the economy has slowed considerably.

'The US economy, through a combination of a significant housing correction, high energy prices and capital market turmoil, has slowed appreciably,' he said in prepared remarks.

Under lawmakers' questioning, however, he acknowledged that some economists who argue that a recession is already under way could be right. But he said this doesn't change his mission to stimulate the economy and deal with the housing crisis.

'Whether I turn out to be right when I say I think the economy is going to grow this year, or others that say we're in a recession are right, we both agree that the economy is slowing down significantly. We agree that the risks are to the downside and we're focused on them.' -- REUTERS