U.S. mortgage industry hashes out rate-freeze plan

By David Lawder and Patrick Rucker

WASHINGTON, Dec 1 (Reuters) - Mortgage industry executives worked on Saturday to hammer out details of a homeowner rescue plan that would freeze interest rates on some U.S. subprime mortgages for up to seven years, but questions remained over how to avoid investor lawsuits and other legal challenges.

The negotiations among lenders, servicers, investor groups, regulators and other parties were aimed at allowing U.S. Treasury Secretary Henry Paulson to announce a framework for the plan on Monday, with full details expected on Wednesday, said a mortgage sector source involved in the talks.

Paulson on Friday said the mortgage industry was working with the Treasury on a broad plan to help save the homes of subprime borrowers with adjustable-rate mortgages who cannot afford higher payments as their interest rates reset in coming months, but who otherwise could afford to stay in their homes.

The plan's details are now up to the mortgage industry and investors, the two groups that will have to absorb its costs.

"The message is that everybody has to get on the bus," the source said of Paulson's directive.

Details over which mortgages would be considered for an automatic interest rate freeze of five to seven years are still sketchy. The source said that initially, only subprime loans with two- or three-year periods of low "teaser" rates would be considered, but more traditional subprime loans with longer fixed-rate periods could also be modified.

A shorter freeze period was initially considered, but Federal Deposit Insurance Corp. Chairman Sheila Bair pressed in the negotiations for a five- to seven-year freeze. Bair was the first federal regulator to propose a broad rate freeze as California negotiated a similar deal with several top mortgage lenders in the state, hard-hit by the housing downturn.

Estimates of mortgage resets vary. Federal Reserve officials estimate that 2 million mortgages face resets and as many as 500,000 of these could lose their homes.