The Treasury Department is finalizing a plan with mortgage industry leaders that will hold interest payments steady for many subprime borrowers facing higher rates and possible foreclosure.

Treasury Secretary Henry Paulson discussed the plan at a meeting with top banking regulators and industry representatives on Thursday and is expected to announce details of the proposal as early as Wednesday, sources familiar with the meeting told Reuters.

The mortgage representatives and regulators are focusing in on restructuring 2-28 and 3-27 subprime loans, which start with a fixed mortgage rate of up to three years but then reset to a much higher rate.

During the five-year U.S. housing boom that ended in 2005, such adjustable-rate loans were widely available to subprime borrowers with damaged credit. Many of these loans are entering default after they reset to higher rates.

As envisioned, the plan would effectively extend the fixed-rate period for stressed borrowers and so shield them from a payment spike that could push them into foreclosure.

Industry representatives and regulators are still thrashing out details of who would qualify for the interest rate amnesty and how long to extend the fixed-rate period of the loans.

Mortgage industry representatives want to limit mortgage relief to borrowers who have a proven record of making payments under the initial rates.

The plan will likely be discussed Monday at a housing conference to be held in Washington and organized by the Office of Thrift Supervision.

OTS Director John Reich was one of the regulators to attend the Thursday meeting and he was encouraged with the progress made toward a balanced approach that will help people stay in their homes without negatively affecting the markets, said OTS spokesman William Ruberry.

Treasury spokeswoman Jennifer Zuccarelli would give no details about Thursday's meeting except to say it was a chance for regulators to learn more about the mortgage industry's outreach efforts.

They wanted to hear an industry update on ways to help more struggling homeowners as quickly as possible. We are encouraged by the process, she said.

For some time Sheila Bair, chairman of the Federal Deposit Insurance Corp, has been pushing servicers and lenders to change the terms of the loans to minimize losses for both the homeowner and investors. She took part in Thursday's meeting along with Federal Reserve Board Governor Randall Kroszner.

The White House on Friday said it was premature to discuss possible new steps to address the mortgage crisis and declined to comment on reports that officials are working on a deal with lenders to freeze interest rates on some loans.

It's premature to talk about those discussions at this point, White House spokesman Scott Stanzel told reporters.

Financial markets have been spooked in recent months as defaults have risen and many investors are struggling to get a handle on the value of these sinking loans.

In an interview with BusinessWeek magazine, Paulson said he hoped to have a final industry consensus on a loan modification plan before the end of the year.

We'll have broad agreement on criteria that will make it easier to modify mortgages in the volumes we need, Paulson was quoted as saying in the magazine's December 10 issue.

T.J. Marta, a fixed income strategist at RBC Capital Markets in New York, said freezing adjustable mortgage rates would anger some investors who bought mortgage backed securities, but it could help forestall a massive domino effect that could drag down a wide swath of financial assets.

Your purists are going to scream to high heaven that their contract is being altered, but your pragmatists are going to say, 'Do I want to reduce cash flow or see my Triple A-rated bond go south?' Pragmatists are going to do the deal, Marta said.

He said it was hard to overstate the severity of the effect of massive mortgage foreclosures on Wall Street, where exposure to subprime mortgages has been spread like pixie dust.