The nation's largest financial institutions, under mounting pressure from federal officials, might soon disclose a plan to suspend scheduled increases in the monthly payments for many borrowers with subprime loans.
The plan would freeze the interest rates on subprime loans with adjustable rates, which generally begin to increase after a two-year introductory period. Borrowers would instead continue to pay the introductory rate.
The industry and US Treasury Secretary Henry Paulson have agreed to focus the plan on borrowers who can afford their current payments, but could not afford increased payments. Other borrowers, both those able to afford the increased payments and those who can't even afford current payments, would still face rate increases.
The details - including the duration of the freeze, which could range from one year to seven years - are still being negotiated. But Paulson and other participants say they hope to have a deal by next week. It would be the largest step yet taken to curtail the rapid growth in foreclosures nationwide.
"I'm really happy to hear they're on this track because they've spent so much time talking about counseling and hotlines and 800 numbers and all of this while Rome burns," said John Taylor of the National Community Reinvestment Coalition, a consumer group that has pressed for stronger action by the Bush administration.
Taylor said a lot of borrowers can still be helped before their payments increase. "The peak is coming in May 2008," he said. "There's a million homes lost to foreclosure, but there's two million more still coming."
In Massachusetts, more than 24,650 adjustable-rate mortgages will reset to higher interest rates in 2008, according to First American Loan Performance, a California data provider.
For subprime loans with adjustable interest rates made in 2006, the average introductory rate was about 8.5 percent. Those loans will reset in 2008. If they reset at current market conditions, the new rate would be about 11 percent. For a borrower with a $300,000 mortgage, the monthly payment would increase more than $500.
For much of this year the lending industry resisted proposals to rewrite large numbers of the at-risk loans, preferring instead to working with borrowers individually. The federal government focused on encouraging borrowers to contact lenders.
Both sides started to consider more dramatic action after a September survey by Moody's Investors Service determined lenders modified only 1 percent of adjustable-rate subprime loans that reset during the first three quarters of 2007.
Paulson signaled his intentions in an interview last week, saying restructuring loans individually had proven ineffective and that a new approach was needed.
The industry has negotiated with Paulson through the Hope Now alliance, a new group that includes nine of the nation's largest servicers of subprime loans; the group estimates its members collect payments on about 85 percent of subprime mortgages.
"I think everyone agrees that there needs to be an expedited mechanism for handling these things," said Paul Leonard of the Financial Services Roundtable, an industry group that is one of the forces behind Hope Now. He said it was in everyone's interest to help those borrowers able to make some amount of payments.
Paulson and industry representatives met on Thursday to discuss the plan. In addition to the length of the freeze, it is not yet clear who would determine which borrowers are eligible, and on what basis precisely, and whether investors holding the rights to collect loan payments would be compensated.
The major sticking point is the reluctance of these investors. Financial analysts say major investors are not yet convinced a broad restructuring would avoid enough foreclosures to make it worthwhile to forego the additional payments.
In a sign that stance may be softening, Thursday's meeting included the American Securitization Forum, which represents participants in the business of investing in mortgage loans. The forum issued a statement yesterday saying it was now amenable to the idea of "systematic procedures to modify loans."
Representative Barney Frank, a Massachusetts Democrat, who coauthored legislation to increase regulation of the mortgage industry that has passed the House and awaits Senate action, hailed the progress in a statement. "If additional legislative action is necessary, we stand ready to work with the secretary as this process moves forward," Frank said.
The nascent federal plan has some precedent. Countrywide Home Loans, the nation's largest mortgage lender, has pledged to freeze interest rates for 80,000 customers by refinancing their adjustable-rate loans into fixed-rate loans.
Countrywide and three other mortgage companies also agreed last week to freeze interest rates on subprime loans for some customers in California. The deal, revealed by Governor Arnold Schwarzenegger, did not specify how many loans would be frozen - probably about 100,000 - or how long the freeze would last.
Binyamin Appelbaum can be reached at bappelbaum@globe.com.
