Treasury Secretary Henry Paulson said Monday he expects the federal government and a consortium of banks, mortgage servicers and lobbyists to agree this week to a rate-adjustment plan to contain the damage caused by the subprime mortgage collapse. He also urged Congress to pass new housing legislation and back a White House proposal to use tax-exempt bonds to refinance subprime mortgages. The object of the rate plan is to alter the way ARM mortgages are reset to prevent large numbers of people from being suddenly confronted with unmanageable monthly payments. "The number of subprime mortgage resets is going to increase dramatically next year, and we need to make sure the capacity is there to handle it," he said. He did not specify how long a rate-adjustment moratorium should last, but a three-to-seven year range has been proposed, with FDIC Chairman Sheila Bair favoring five years. To be eligible for the plan, a borrower will have to be current on his or her payments and able to continue to pay the introductory rate, but not the adjusted rate -- a definition that will likely exclude a majority of subprime mortgage holders. "There is not a cookie-cutter approach that can be taken to this," said banking consultant Bert Ely. "This is going to be a mess."
Additional Reading: Hank Paulson’s ARM Bailout: Swing and a Miss • ARM Loan Modifications: Delaying the Inevitable
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