Treasury near subprime aid deal

By Patrick Rucker and John Poirier

WASHINGTON (Reuters) - The Treasury Department and mortgage industry leaders are putting the final touches on a plan that could save struggling homeowners from foreclosure by freezing interest rates before they reset sharply higher.

With more than 2 million subprime borrowers facing higher mortgage costs and the possible loss of their homes if they cannot meet the payments, Treasury Secretary Henry Paulson is expected to announce details of the plan as soon as Wednesday, sources familiar with the matter told Reuters.

Mounting mortgage foreclosures have spooked financial markets around the globe in recent months. Many sinking loans had been repackaged as securities and sold to investors, who are scrambling to get a handle on the value of their assets.

News of the initiative helped lift stock prices, which had been battered in recent weeks by growing global credit strains and billions of dollars of write-downs on bad mortgage bets by major financial institutions.

"If credit concerns can ease, then maybe we're out of the woods and a lot of the write-downs are probably over," said David Goerz, chief investment officer at High Mark Capital Management in San Francisco.

Shares of lenders and other mortgage-related companies surged, as did shares of home builders.

The American Securitization Forum, which represents many mortgage investors, endorsed Paulson's effort in a statement, saying: "We support loan modifications in appropriate circumstances."

PAYMENT SPIKE SHIELD

Regulators and the mortgage industry are focused on restructuring 30-year subprime loans that carry fixed interest rates for up to three years but then reset at higher rates, hitting borrowers with sharply higher costs.

During a five-year housing boom that ended in 2005, these adjustable-rate loans were widely available to subprime borrowers, whose spotty credit histories left them with limited loan options. While the loans offer initial low, "teaser" interest rates, they reset at rates much higher than those offered to prime borrowers with strong credit records.

As envisioned, Treasury's plan would effectively extend the fixed-rate period for stressed borrowers, shielding them from a payment spike that could push them into foreclosure.

The White House on Friday said it was appropriate to build a "bulwark" against the housing sector's woes, but said it was too soon to discuss details of any plan.

Democratic lawmakers, who have accused the administration and regulators of moving too slowly, welcomed the effort.

"It is imperative that the administration ensure that there is no further delay in reaching homeowners in need of loan modification," said Senate Banking Committee Chairman Christopher Dodd of Connecticut.

Dodd's counterpart in the House of Representatives, Rep. Barney Frank of Massachusetts, said he was prepared to move legislation if needed to help the effort.