Rate freeze sought on some loans

WASHINGTON -- The Bush administration and the mortgage industry, trying to combat a massive wave of foreclosures, are hammering out a proposal to temporarily freeze interest rates on certain troubled sub-prime mortgages. If adopted, it would be the biggest action taken to cope with the unfolding crisis.

The administration was holding discussions Friday, trying to work out details of the proposal, which could be unveiled as early as next week. Some indications of the outlines of the proposal may come in a speech Treasury Secretary Henry Paulson is scheduled to deliver to a national housing conference Monday.

The talks have involved all the federal banking regulators and major players in the mortgage industry such as Citigroup Inc., Wells Fargo & Co. and Countrywide Financial Corp.

The major thrust of the proposal would be to get lenders to extend for a number of years the low, introductory rates that were offered on sub-prime mortgages, loans usually offered to borrowers with weak credit histories.

An estimated 2 million of those initial low, teaser rates are scheduled to reset to much higher levels by the end of next year, pushing the payment on a typical mortgage from $1,200 per month to $1,550, an increase of $350. The concern is many homeowners will not be able to meet the higher payments, triggering hundreds of thousands of defaults. That would dump even more unsold homes on an already glutted housing market, pushing home prices down further, jolting consumer confidence and raising the risks of a full-blown recession.

The officials and industry are debating time periods for the rate freeze of two to five years. Once the industry stabilizes and home prices are no longer falling, it will be easier for homeowners to refinance their adjustable rate loans to more favorable fixed-rate mortgages.

Asked about the proposal on Friday, presidential press secretary Dana Perino said, "The president has been clear that no taxpayer money should be used for any sort of bailout."

The plan would mean losses for investors who purchased mortgage-backed securities.