Paulson says markets calmer but not fully settled

By Glenn Somerville

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson said on Friday that markets have calmed down to the point where prices will be driven by economic factors including an improving housing market rather than by fear.

"The markets are considerably calmer now than they were in March," Paulson told regional business leaders. "Looking forward, I expect that financial markets will be driven less by the recent turmoil and more by broader economic conditions and, specifically, by the recovery of the housing market."

He repeated that he thought the period of market turmoil was nearer an end than a beginning but warned that home foreclosures will remain high while a correction that includes falling house prices continues.

"We should not expect to work through this process quickly and we should expect some bumps in the road," Paulson said, though he forecast the economy will be growing more rapidly by the end of the year than it is now.

He said a Treasury-sponsored alliance of home mortgage lenders called Hope Now has made "enormous progress" in helping holders of subprime mortgages, those made to less credit-worthy borrowers, modify their terms to avoid foreclosure.

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Still, he cautioned a housing correction that began in 2006 will take time to resolve because past underwriting standards for loans were so sloppy that inventories of homes are bloated and it will take time for normal activity to resume.

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