WASHINGTON - Treasury Secretary Henry M. Paulson Jr., seeking to limit damage from a subprime-mortgage crisis that threatens to end the U.S. economic expansion, said yesterday that he was confident that the government and the industry would agree on a rescue plan this week.
Paulson is negotiating a deal among banks, mortgage servicers, and securities-industry lobbyists to freeze some subprime mortgages before they reset in 2008 to higher rates and trigger a likely wave of defaults.
The Treasury chief also proposed letting state and local governments temporarily exempt taxes on bonds issued to help refinance subprime loans.
Subprime loans, given to people with poor or incomplete credit histories, typically offer a low introductory rate for the first two or three years. The rate then adjusts, or resets, to a higher one for the duration of the mortgage, usually 30 years. About 100,000 such loans will reset each month over the next two years, according to research by UBS AG.
Borrowers "with steady incomes and relatively clean payment histories" will be the focus of the mortgage restructuring deal, Paulson said in a speech at an Office of Thrift Supervision housing conference. "Treasury is aggressively pursuing a comprehensive plan to help as many able homeowners as possible keep their homes."
Separately, Housing and Urban Development Secretary Alphonso Jackson said in an interview yesterday that the Bush administration expected to make an announcement Thursday.
The goal of the rescue is to keep an expected avalanche of threatened foreclosures in the coming year from sinking the overall economy, as well as enabling owners to keep their houses.
Paulson did not comment on how long a freeze on mortgage rates he is seeking. But thrift office director John Reich said he supported a three- to five-year freeze for mortgage borrowers at risk of foreclosure. Sheila Bair, chairman of the Federal Deposit Insurance Corp., favors extending introductory rates for at least five years.
Investors who buy mortgages and would see lower payments on the loans are arguing for a shorter period: one to two years.
Robert Toll, chairman of Toll Bros. Inc., the Horsham, Pa., firm that is the largest U.S. builder of luxury homes, said that, while the plan would help, defining the group most in need of help was "key."
Paulson identified four categories of subprime borrowers:
Those who can afford to pay adjustable-rate loans.
Those who do not have "the financial wherewithal to sustain homeownership."
Those who choose to refinance their mortgages - which he called "the first, best option."
Those who can afford the introductory rate but not the adjusted one.
The government is concentrating on helping the last category, he said. Taxpayer funding is not involved, Paulson said.
Key elements of plans being discussed:
Freeze low introductory mortgage rates, preventing them from rising.
Time frame for the freeze likely would be between one and seven years.
Talks to implement a freeze are ongoing among Treasury Secretary Henry M. Paulson Jr., mortgage industry leaders, bankers and securities-industry lobbyists.
Another plan would allow state and local governments to broaden tax-exempt-bond programs to include mortgage refinancings that provide lower rates for borrowers.
Congress is considering a bill to let the government guarantee mortgages for delinquent borrowers.