Feds, Banks Working on Subprime Rate Freeze Pact

The U.S. government and a cabal of the largest mortgage lenders in the country are close to an agreement that would temporarily freeze interest rates on subprime mortgages in danger of default, according to a front-page piece in Friday’s Wall Street Journal.

The deal could be announced next week according to the Journal‘s sources.

The negotiations are taking place between the U.S. Treasury Department and a coalition of banks – calling themselves the Hope Now Alliance – that includes Citigroup, Wells Fargo, Washington Mutual, and Countrywide Financial.

The deal would extend the life of introductory “teaser” rates on the adjustable rate mortgages that many home buyers with less than stellar credit signed on to in the last decade. Under these subprime mortgages, the borrower pays a teaser rate for a year or two before the rate jumps as much as 40 percent, carrying monthly payments up with it.

Negotiators are still discussing how long the freeze will last, the criteria that will be used to select eligible borrowers, and other details.

According to the Journal, all of the banks involved in the coalition have vowed to abide to an agreement once it has been struck.