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 subprime mortgages. If adopted, it would be the biggest action taken to cope with the unfolding crisis.
The administration was still holding discussions on 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 on 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 subprime 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 that 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.
By offering a broad approach to extend the teaser rates for a certain period officials and the industry are debating time periods of two to five years it would allow between homeowners to keep making payments while the housing industry regains its footing.
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 under consideration does not include any government funds, but it would mean losses for investors who purchased mortgage-backed securities because they would be getting a lower income stream reflecting the delay in having the introductory interest rates reset. But it would still represent more money than if the mortgage went into default.
The rising tide of defaults on subprime mortgages in recent months has already forced a number of major financial institutions to declare multibillion-dollar losses, a development that seriously roiled financial markets not only in the United States but also in Europe over the summer.
Economists on Friday generally praised the administration's effort, saying it should help stave off a potential recession in this country.
"This is a significant problem that could overwhelm the economy unless policymakers take action," said Mark Zandi, chief economist at Moody's Economy.com. "The economy is already on the brink of a recession."