Paulson: markets calmer but not fully settled

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson said on Friday that U.S. financial markets were calming down from March's turmoil but warned more pain lies ahead for borrowers who face losing their homes through foreclosure.

"We are seeing signs of progress as capital and credit markets stabilize," Paulson said in remarks to top regional business leaders. "The markets are considerably calmer now than they were in March."

But he said a housing correction that began in 2006 still has room to run because past underwriting standards for loans were so sloppy that it will take time to work down inventories and resume a normal level of housing activity.

"There were years of excesses," Paulson said. "And this won't be resolved quickly."

Paulson described the housing downturn as the biggest single risk for the U.S. economy and urged Congress to move ahead with naming a strong regulator for mortgage lending giants Fannie Mae and Freddie Mac.

"Together, they touch 80 percent of all current mortgage originations and a regulator on par with other financial regulators will bring confidence to all mortgage market participants," Paulson said.

Citing signs of market progress, Paulson said that liquidity and investor confidence were "gradually improving, not across the board, but in several sectors including corporate bonds, leveraged loans and high yield debt."

He repeated that he believed the market turmoil was closer to an end than to the beginning and said that, in future, he expected markets to be driven less by turmoil and more by a recovery in the housing sector.

(Reporting by Glenn Somerville; Editing by Andrea Ricci)

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