More subprime legislation on the way

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WASHINGTON, DC – US Treasury secretary Henry Paulson is preparing to unveil a plan to curb further deterioration in the US subprime mortgage market. The plan is expected to include measures to freeze interest payments on loans to borrowers facing default. The Treasury is also in negotiations to fix interest rates on adjustable-rate mortgages for five years, which had been set at a low introductory rate but could jump to unmanageable levels for some borrowers.

This agreement would satisfy the demands of the Federal Deposit Insurance Corporation and the Treasury Department’s Office of Thrift Supervision, but the five-year period suggested is much more than the minimum two- to three-year modifications suggested by Fannie Mae.

There are some concerns over the prospect of lawsuits from investors in bonds that are backed by the mortgages to be rewritten. The longer that lower rates are extended, the more risk posed to the bonds’ values. Democratic representative Mike Castle of Delaware has proposed legislation offering a “safe harbour from legal liability” to mortgage servicers.

About 30% of borrowers with subprime adjustable-rate mortgages are behind on their payments, even before the interest rate increase. Estimates from Credit Suisse suggest as many as 775,000 homes, with $143 billion of mortgage debt, will go into foreclosure over the next two years.

President George W Bush and Paulson are expected to announce the plan later this week.

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