Paulson says mortgage plan to be ready this week

By Patrick Rucker and John Poirier

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson said on Monday he hoped a plan to spare homeowners facing mortgage-rate spikes would be ready by week's end and expressed faith the economy would dodge recession despite the deep housing slump.

More than 2 million subprime borrowers took out mortgages with low teaser interest rates that are due to reset sharply higher, and officials fear as many as 500,000 could lose their homes because they will be unable to meet the higher payments.

The Bush administration and federal regulators have been pushing the mortgage industry to temporarily freeze interest rates on some of these loans, which were aimed at borrowers with spotty credit history.

Rising defaults on U.S. subprime mortgages, which were repackaged as securities and sold around the globe, have rattled financial markets in recent months, drying up credit and putting the world's largest economy at risk.

"The government has a role to play," Paulson said at a federal housing symposium at which he also called on Congress to offer more generous tax treatment for local government bonds used to refinance mortgages.

"We are proposing to allow state and local governments to temporarily broaden their tax-exempt bond programs to include mortgage refinancing," he said. Currently, state tax-exempt bonds are limited to programs that aid first-time homeowners.

CALLS FOR MORE

Democratic presidential hopeful Sen. Hillary Clinton has proposed a similar expansion of state housing bonds to include mortgage refinancing.