Lenders and loan servicers who have signed onto the Bush administration’s HOPE NOW initiative to improve communications with troubled borrowers may be prepared to take a more radical step — freezing the interest rates on some subprime loans scheduled to reset.

When launched in October, the HOPE NOW initiative was a partnership between the Treasury Department, U.S. Department of Housing and Urban Development, and 11 loan servicers that handle 60 percent of U.S. mortgages to expand outreach to borrowers facing foreclosure.

Since then, the Bush administration has been negotiating with the coalition’s members to engage in large-scale workouts with troubled borrowers. The Wall Street Journal reported today that while details of such a plan are still being worked out, an agreement could be announced as soon as next week.

Treasury Secretary Henry Paulson is scheduled to speak Monday at a National Housing Forum hosted by the Office of Thrift Supervision, where he will discuss efforts to address housing and mortgage markets issues.

The idea of conducting wholesale workouts with troubled borrowers was proposed in early October by Federal Deposit Insurance Corporation chief Sheila Bair.

Citing a report by Moody’s Investor Services that loan servicers were engaging in workouts on less than 1 percent of troubled subprime loans, Bair said looming interest rate adjustments on millions of adjustable-rate mortgage (ARM) loans present a “huge problem.”

“We can’t just sit here doing this kind of case-by-case, laborious restructuring process with all these millions of subprime hybrid ARMs,” Bair said at the time.

Although many investors in securities backed by subprime loans have opposed conducting wholesale workouts, the Journal said they have become more receptive to the idea, because they could come out ahead in the long run.

Declining home prices have put many borrowers in a position where their home is worth less than they owe on their mortgage. When borrowers with ARM loans see their monthly payments increase when low, initial “teaser” rates expire, many have little incentive to continue making payments and end up in foreclosure.

Although freezing interest rates would reduce the yields investors receive from some mortgage-backed securities, they could theoretically face even bigger losses if large numbers of loans in the “pools” that make up the securities end up in default.

Some have speculated that if lenders, loan servicers and investors agree to conduct wholesale loan modifications, only borrowers who are current on their loans and who live in their homes would be eligible. If that’s the case, borrowers who are in default and owners of second homes and investment properties would not be covered under the agreement.

The Bush administration’s FHASecure program helps borrowers who are in default refinance their mortgages, but many mortgages exceed FHA limits. FHA loan limits are currently $200,000 in lower-cost areas and $362,000 in high-cost areas, although the administration supports raising them to and $271,000 in lower-cost areas and $417,000 in high-cost areas.

The Journal reported that eligibility criteria for HOPE NOW workouts could be finalized by the end of the year and that one scenario involves freezing interest rates on eligible loans for up to seven years.

HOPE NOW participants include Bank of America, Citigroup Inc., Countrywide Financial Corp., Fannie Mae, Freddie Mac, First Horizon National Corp., GMAC ResCap, HSBC North America Holdings Inc., JPMorgan Chase & Co, National City, Option One Mortgage, SunTrust Mortgage Inc., Washington Mutual Inc., and Wells Fargo & Co.

This month, the HOPE NOW initiative sent more than 300,000 letters to borrowers who “could have the option to work out a more affordable solution,” Treasurer Anna Escobedo Cabral said today in remarks to Atlanta’s Commerce club.

Four lenders that service 25 percent of outstanding subprime loans in California entered into a similar, voluntary agreement with Gov. Arnold Schwarzenegger this month.

Schwarzenegger said 500,000 Californians with subprime loans face interest rate adjustments in the next two years, and that the voluntary agreement with Countrywide Financial Corp., GMAC Mortgage, Litton Loan Servicing and HomeEq Servicing was modeled after the proposal put forward by Bair.

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