(Agencies)
Updated: 2007-12-07 10:56

Many of the loans were repackaged as securities and sold to investors around the globe. As defaults rose, credit markets seized up as investors scrambled to try to determine who was facing losses and how large they might be.

US Treasury Secretary Henry Paulson said the plan would buy time to allow the economy to work through its ills. "What five years does is it gives ... us as a country, a chance to work through this housing cycle," he said.

Concerns Remain

While avoiding a wave of foreclosures would likely bolster an already wobbly economy, ratings firm Standard & Poor's said freezing rates on subprime mortgages may lead to further deterioration in credit ratings on bonds backed by the loans.

Some on Wall Street worried they would be forced to accept mortgages rewritten in the borrowers' favor.

"To say to investors that the terms of the contract you signed are going to be overwritten is a clear disincentive to investors to provide capital going forward," said Larry Smith, chief investment officer at Third Wave Global Investors in Greenwich, Connecticut. "That's just not what government is supposed to do."

Nonetheless, investors cheered the news, sending Wall Street stocks sharply higher on views that limiting foreclosures would keep the economy from sliding into a recession.

The plan would offer a five-year rate freeze to subprime borrowers who took out loans from January 1, 2005, through July 31, 2007, that are due to reset over the coming two-and-a-half years.

Democrats welcomed the plan, but said more was needed.

House of Representatives Financial Services Committee Chairman Barney Frank applauded the effort, but said it would punish borrowers whose credit had improved. As envisioned, those homeowners could be considered strong enough to handle a rate reset.

Answering those concerns, Federal Deposit Insurance Corp Chairman Sheila Bair said the plan was an "initial" move and subject to further refinement.

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