WASHINGTON (MarketWatch) -- Treasury Secretary Henry Paulson said Monday he's confident that a plan to help borrowers of subprime mortgages will be agreed upon soon.
The Bush administration has been working with mortgage servicers and investors to come up with a strategy to modify and refinance loans for certain subprime-mortgage borrowers.
As more such loans reset next year, "we will need an aggressive, systematic approach to fast-track able borrowers into a refinance or mortgage modification," Paulson said in a speech to an Office of Thrift Supervision conference.
In an interview later Monday on Bloomberg TV, Paulson also said that a plan to freeze interest rates on troubled subprime home loans could be announced this week.
"I am optimistic we are going to have something to answer before the end of the week," he commented.
In his speech, Paulson reiterated that the downturn in the housing market is "the biggest challenge to our economy," but said that the Treasury's plan to help out subprime borrowers doesn't include spending taxpayer money on funding or subsidies for either the industry or homeowners.
Speaking at the same housing conference on Monday, Washington Mutual Inc. (WM:
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Chairman and Chief Executive Kerry Killinger said that the mortgage industry needs to find the "right safe harbor" for troubled borrowers.
"We just need to see if we can't get to a collective decision," he added.
On Monday, Paulson called for state and local governments to temporarily broaden their tax-exempt bond programs to include mortgage refinancings. If enacted, he said, the move would reduce the cost of some mortgage programs and allow the governments to reach more struggling homeowners. Read Paulson's speech.
The administration and Congress have been scrambling to address the woes in the subprime-mortgage market. Interest rates on about 2 million adjustable-rate mortgages are set to rise over the next two years, with many foreclosures a possible result.
Speaking at the same conference, Housing and Urban Development Secretary Alphonso Jackson urged Congress to pass a bill modernizing the Federal Housing Administration.
"With new legislation, refinancing and other FHA products, we will be able to help nearly half a million people next year buy and keep their homes," Jackson said. He added that his department has "exhausted our own administrative actions."
Analysts said the reported plan from Treasury could either help or hurt efforts to pass mortgage-reform legislation. "We believe failure to implement a comprehensive freeze -- or any freeze at all -- at this point will reinvigorate Democratic efforts to enact mortgage-bankruptcy reform," wrote Jaret Seiberg of the Stanford Group Company, in a note Monday morning.
However, according to Brian Gardner of Keefe, Bruyette & Woods, the Treasury plan could take pressure off of lawmakers to push through reforms.
In a note Monday, the analyst said that the chances for a reform bill would be less than 25% if Treasury succeeds in its negotiations with the mortgage industry and if the Fed announces changes to rules governing high-cost mortgages.
View from the Boston Fed
Meanwhile, earlier Monday, Boston Fed Bank President Eric Rosengren said research at the Boston Fed suggests that the foreclosure crisis in subprime mortgages will get worse before it gets better.
Just how much worse depends on the outlook for the economy and housing, he commented: "Our forecast is quite dependent on how far home prices fall."
He urged community banks and states to focus on the 87% of subprime loans that are not seriously delinquent and where action may avoid future problems.
Rosengren said that he was not advocating any bailout, and wanted to use "existing programs for what they were designed to do." Some of the programs administered by the Federal Housing Administration could be modernized, he elaborated.
FHA lending is underutilized, falling to 2.8% of mortgages originations in 2006 from 16% in 2000. Many banks are not FHA-approved lenders, according to Rosengren.
Also Monday, Sen. Hillary Clinton called for a 90-day moratorium on home foreclosures, as well as a five-year freeze on the rates of adjustable mortgages.
Meanwhile, Senate Banking Committee Chairman Christopher Dodd, D-Conn., also a presidential candidate, called on the White House to push loan servicers to put in place broad-based and transparent loan modifications.
"Modifications also need to be made available to borrowers who have become delinquent because of loan resets, but who had been current prior to that. These homeowners should not be punished because of the abusive loans they were sold," Dodd said in a statement.
Robert Schroeder is a reporter for MarketWatch in Washington.
Greg Robb is a senior reporter for MarketWatch in Washington.