WASHINGTON (Reuters) - President George W. Bush is expected to outline on Thursday a plan to freeze mortgage rates for five years for many U.S. homeowners facing sharp increases in their monthly payments, industry sources said on Wednesday.

President Bush stands in front of Air Force One as he makes remarks about Iran during a visit to Omaha, Nebraska December 5, 2007. REUTERS/Kevin Lamarque

Final details of the plan are still being worked out after a trade group that represents large mortgage investors presented its framework for implementing a broad rate freeze to the Treasury Department late on Tuesday, the sources said.

“The president will make a statement on housing issues tomorrow afternoon,” a senior administration official said, declining to elaborate on details.

The sources, who are familiar with details of the trade group’s pitch, said the plan envisions covering subprime loans taken out between January 1, 2005, through the end of this past July, with rates that are due to reset over the coming 2-1/2 years.

An estimated 1.8 million U.S. homeowners who took out loans with low teaser rates face pricey loan resets next year alone, the Federal Reserve has said. Officials fear half a million borrowers risk losing their homes.

Treasury Secretary Henry Paulson has worked closely with the investor trade group - the American Securitization Forum - as well as mortgage servicers and lenders to hammer out a comprehensive plan to modify troubled loans.

On Wednesday morning, Paulson outlined to a closed-door meeting of Republican lawmakers his efforts to broker a rescue plan for troubled borrowers.

“It was all broad-picture,” said Ed Royce, a California lawmaker who sits on the House Financial Services Committee and who attended the briefing. “He was upbeat about the way those negotiations are going.”

House Republican Leader John Boehner of Ohio said “I think the proposal being outlined is a good one.”

SPREADING FEARS

Rising defaults on U.S. subprime loans, aimed at borrowers with a spotty credit history, have spooked financial markets around the globe in recent months, tightening credit conditions and threatening to derail the U.S. economy.

Many sinking loans had been repackaged as securities and sold to investors, who are having a tough time getting a handle on the value of their assets.

The proposal to temporarily freeze mortgage rates is primarily aimed at borrowers who can afford their existing rates and who are current on their payments, but who would face default when the rate resets at a higher level.

Under the plan pitched by the ASF, distressed homeowners would be offered mortgage help according to their ability to pay.

Borrowers with strong credit would be encouraged to drop their existing loan and be shepherded to more affordable mortgages like those offered under the Federal Housing Administration. In August, Bush expanded that government program so that it could reach an additional 240,000 troubled borrowers next year.

A second class of borrowers who simply do not have the resources to make mortgage payments would return to the rental market.

A third group of borrowers who have shown that they are a reasonable credit risk but who could not afford their homes with higher rates would qualify for “fast-tracked” loan modification and a five-year interest rate freeze.

Other existing borrowers who have struggled to keep up their loan payments could still qualify for the freeze, but would face more scrutiny before receiving any loan modification.

The backing of mortgage investors is important to the success of any rate freeze plan as it would give some cover to mortgage servicers and others in the industry who could face lawsuits from bondholders if they began to tinker with loans.