Accord set for some subprime mortgage loans

Lenders will suspend rate increase for those current on payments

The Bush administration plans to reveal today an agreement with the mortgage industry to stem foreclosures by suspending scheduled increases in the monthly payments on certain subprime loans.

Borrowers who are making their mortgage payments now, but would not be able to afford a scheduled rate increase, would have their payments frozen at current levels for five years, according to people with knowledge of the plan.

A broad range of politicians and policy experts hailed the agreement as a necessary and important step to limit foreclosures among the millions of borrowers facing rate increases in the next two years.

But many of the agreement's supporters also were quick to highlight its shortcomings: The plan does not help borrowers who have already fallen behind on their mortgage payments nor does it help borrowers whom the industry determines can afford increased monthly payments when their loan rates adjust upward.

And for the borrowers who do qualify, it offers a temporary reprieve, not a permanent solution.

"It kicks the can down the road," said Representative Barney Frank, Democrat of Massachusetts, who said he supports the plan, with some reservations. "It buys you time. And the question is, What can you do with the time?"

Frank said the administration must now push through a variety of measures that would help subprime borrowers refinance into loans with more affordable payments. In particular, many subprime loans require borrowers to pay a hefty fee - a prepayment penalty - before they can refinance. Frank said the penalties must be removed to allow borrowers to take advantage of the five-year freeze. But he said he understood that the Bush plan may not address the issue.

The administration's plan will include adjustable-rate subprime mortgages issued between January 2005 and July 2007, according to people familiar with a draft circulating yesterday. Eligibility is limited to people who live in the mortgaged home; that excludes landlords and investors.

Even at frozen levels, these borrowers will still be paying higher interest rates than those with good credit. The average introductory interest rate on a subprime loan in 2006 was 8.5 percent, the Federal Reserve Bank of Boston reported last week.

Without the freeze, those loans would reset to higher rates in 2008. In 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.

The details of the freeze were negotiated between US Treasury Secretary Henry Paulson, who has pressed the industry for a broad response to the foreclosure problem, and the American Securitization Forum, which represents mortgage investors. Their participation is critical because they are agreeing to forego a portion of the payments they expected to collect.

A spokeswoman for the Forum declined to confirm the details yesterday. The Treasury Department limited itself to a statement announcing a series of news conferences this afternoon to discuss the plan.

It is not clear how many borrowers will benefit from the plan.

In Massachusetts alone, 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.

But the mortgage industry, eager to limit participation, has pushed to exclude borrowers who can afford higher monthly payments. A draft of the plan shows borrowers with credit scores above 660 will face greater scrutiny before the industry agrees to freeze their payments. Those with lower credit scores will be approved more quickly.

Members of both parties in Congress already have criticized that standard as unfair, noting that it essentially punishes more responsible borrowers by requiring them to continue making higher payments.

"My biggest concern is that there are a lot of Americans who are making their mortgage payments, they are current, and the benefit won't go to them," Representative Spencer Bachus, the top Republican on the House Financial Services Committee, told Bloomberg News after a meeting with Paulson yesterday.

Frank, who chairs the committee, expressed a similar concern.

The committee will hold a hearing today on issues related to loan modifications. Frank said he intended to press his concerns about the plan with various federal regulators who are scheduled to testify.

Binyamin Appelbaum can be reached at bappelbaum@globe.com.