Nov. 12 (Bloomberg) -- U.S. home-loan bonds without federal backing fell to new lows after Treasury Secretary Henry Paulson said the government no longer plans to buy devalued mortgage assets, credit-default swap indexes suggest.

The ABX-HE-PENAAA 07-2 index of swaps tied to subprime-loan bonds rated AAA when created in the first half of 2007 dropped about 8 percent to a mid-price of 42, according to a note to clients today from Goldman Sachs Group Inc. The level suggests the bonds might fetch about 42 cents for each dollar of balances.

The second half of a $700 billion financial rescue program approved by Congress last month will be used to help relieve consumer credit, not buy mortgages and related bonds, Paulson said today in a speech. Treasury and Federal Reserve officials are exploring a new ``facility'' to bolster the market for securities backed by assets other than mortgages, he said.

``I will never apologize for changing a strategy or an approach if the facts change,'' Paulson said.

The cost of contracts protecting against defaults on AAA commercial-mortgage bonds rose 30 basis points annually today to 301 basis points, based on a Markit CMBX credit-default swap index, according to a separate note to clients from New York- based Goldman Sachs. A basis point is 0.01 percentage point.

Non-agency home-loan bonds, which rallied before the creation of the rescue program, had already been setting new lows as the credit-market slump broadened, data signaled a weakening U.S. economy, Paulson spent funds on capital injections into banks and concern grew that foreclosure-prevention programs may boost losses, in part by encouraging more defaults.

Loan-Modification Plans

``Uncertainty in investors' minds'' about what types of new loan-modification plans servicers will adopt have also been a drag on prices simply because it makes it harder to value the debt, said Scott Eichel, co-head of asset-backed and mortgage trading at RBS Greenwich Capital.

Legislation is needed to restructure U.S. mortgage servicing contracts to make it easier for lenders to modify loans for homeowners struggling to avoid foreclosure, House Financial Services Committee Chairman Barney Frank said today said at a hearing in Washington.

Non-agency mortgage bonds lack guarantees from Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the U.S. in September, or federal agency Ginnie Mae.

So-called ABX and CMBX indexes have been suggesting higher prices than investors can get for actual bonds. Bonds similar to those tracked by ABX-HE-PENAAA 07-2 have been trading between 30 and 40 cents on the dollar, so declines in swap indexes after Paulson's announcement may not mean that drops will be as steep for bonds, said Eichel, who's based in Greenwich, Connecticut.

``For the last couple of weeks I don't think a lot of people thought they were going to buy a lot of mortgage assets,'' he added in a telephone interview today.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

Last Updated: November 12, 2008 15:34 EST