Paulson's reveals more details about a national mortgage-rescue plan

WASHINGTON — Treasury Secretary Henry Paulson revealed more details about a national mortgage-rescue plan and proposed Monday to help state and local governments issue tax-exempt bonds to pay for mortgage refinancing. He also confirmed that he seeks to freeze temporarily the rates of tens of thousands of home loans that are about to adjust to higher rates.

Paulson told a national housing forum that Congress should authorize state and local governments to broaden their tax-exempt bond programs temporarily. Currently, states have authorization to issue tax-exempt bonds only to aid first-time homebuyers in designated distress zones. Paulson proposed to expand this to allow state and local governments to issue tax-free bonds to help in mortgage refinancing.

He also confirmed that he's trying to craft a plan that would prevent massive foreclosures when roughly 1.5 million adjustable-rate mortgages, or ARMs, reset to higher monthly rates next year. The affected ARMs involve subprime loans — those given to borrowers with weak credit histories.

The Treasury Department hopes to target holders of subprime ARMs who aren't yet behind on their payments but could be next year after their loans reset to higher interest rates.

Paulson stressed that there would be no government subsidy to borrowers or lenders.

The approach assumes that lenders will go along with making less money than they would have once the adjustable-rate mortgages reset — if borrowers were able to pay the higher rates.

The same holds true for investors who purchased the loans on the secondary mortgage market, where they were bundled together with other loans and sold as mortgage bonds.

The incentive for lenders and investors is to keep troubled loans from falling into foreclosure and to come up with an industry-wide plan that will keep losses at a minimum and allow the slumping housing sector to recover.

Paulson's plan seeks to rescue from ARM resets the borrowers "with steady incomes and relatively clean payment histories who could afford the lower introductory rate but cannot afford the higher adjusted rate," he said.

Just who these borrowers are and how they would be identified is still under discussion. It's a thorny issue because as lending standards deteriorated in late 2005 and 2006 at the tail end of a nationwide housing boom, many borrowers took out "no doc" loans — no documentation — for which they didn't reveal their income or inflated their stated income.

Speaking at the same forum, sponsored by the Office of Thrift Supervision, the heads of Countrywide Financial and Washington Mutual Inc., which have among the largest exposures to problem mortgages, publicly supported Paulson's plan.