Dec. 5 (Bloomberg) -- Federal regulators and U.S. lenders agreed to freeze interest rates on subprime mortgages for five years to stem rising foreclosures, said a person familiar with the measure.

President George W. Bush will announce the accord tomorrow, which was negotiated by officials including Treasury Secretary Henry Paulson. Paulson will hold a press conference at 1:45 p.m. in Washington to discuss the plan, Treasury said in a statement.

``We have got to do something drastic, and we have to do something quickly,'' said Representative Elton Gallegly, a Republican from California. ``I don't like the government getting involved in the private sector, but we have potential problems we are already seeing come to pass.''

Paulson finalized the deal as the housing recession entered a third year, threatening the economic expansion. The collapse in the market for securities backed by subprime mortgages cost the chief executive officers of Merrill Lynch & Co. and Citigroup Inc. their jobs, roiled markets from Auckland to New York and forced the Federal Reserve to cut interest rates twice.

More than 30 percent of borrowers with subprime adjustable- rate mortgages are behind on their payments before their loans reset higher and 775,000 homes with $143 billion of mortgage debt will go into foreclosure over the next two years, according to estimates from analysts at Credit Suisse Group.

Stocks Rally

Financial shares in the Standard & Poor's 500 Index climbed after negotiators reached a consensus on the freeze. Freddie Mac, the second-largest provider of money for U.S. home loans, gained 3.8 percent. Washington Mutual Inc., the largest American savings and loan, advanced 2.5 percent.

The freeze may apply to mortgages issued between January 2005 and July 2007 that are scheduled to reset between January 2008 and July 2010, said a person familiar with the plan. Borrowers whose credit scores are below 660 out of a possible 850 and haven't risen by 10 percent since the loan was sold will be given priority.

Those with scores above 660 will be more closely scrutinized to determine whether they are eligible or must continue making payments under existing terms, said the person. Most U.S. banks use FICO credit scores, a product of Minneapolis-based Fair Isaac Corp., to judge a borrower's ability to repay loans. Scores determine the interest rate charged to a customer.

Officials and company executives spent much of the past week negotiating over how long to extend starter rates on subprime mortgages, which are usually given to people with poor or incomplete credit histories. Legislators were briefed today.

Clinton Backing

Democratic Senator Hillary Clinton of New York, a candidate for her party's presidential nomination, reiterated her support for a five-year freeze. Some Republicans expressed skepticism.

``My biggest concern is that there are a lot of Americans who are making their mortgage payments, they are current, and the benefit won't go to them,'' Representative Spencer Bachus, the top Republican on the House Financial Services Committee, told reporters after the meeting with Paulson today.

One challenge will be to craft a deal minimizing lawsuits from investors in bonds backed by the mortgages being rewritten, analysts said. The longer that lower rates are extended, the more risk posed to the bonds' values. Republican Representative Mike Castle of Delaware has proposed legislation offering a ``safe harbor from legal liability'' to mortgage servicers.

`Least Costly'

The accord ``is the alternative that is least costly to most parties,'' said Susan Wachter, professor of real estate at the University of Pennsylvania's Wharton School in Philadelphia. ``The magnitude of the economic impact on housing prices in the absence of this plan under current conditions is large.''

About 100,000 subprime loans will jump from their discounted initial rates every month for the next two years, UBS AG estimates. American home foreclosures almost doubled in October from a year earlier as subprime borrowers failed to make higher payments on adjustable-rate mortgages, Irvine, California-based RealtyTrac Inc. said on Nov. 29.

These mortgages usually begin with a rate of 7 percent to 9 percent and then reset to between 11 percent and 13 percent. ``What we are talking about is having these loans modified, so they continue for a longer period of time at the starter rate,'' John Reich, director of the Office of Thrift Supervision, said in an interview in Washington Dec. 3.

Risk to Spending

Paulson and Fed Chairman Ben S. Bernanke are concerned that falling home values will choke consumer spending, which has driven economic growth since the last recession ended in 2001. By heading off further deterioration in the $11.5 trillion mortgage market, officials are also aiming to stem losses on securities backed by subprime loans.

The Bush administration's efforts to forge an agreement have become more urgent as the economy falters after a third-quarter spurt. Growth may cool to an annual rate of less than 1 percent in October to December, economists say, following an expansion of 4.9 percent in the prior three months.

``The concern is that macroeconomic conditions will deteriorate significantly, which can happen in the absence of such a plan,'' said Wachter at the Wharton School.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: December 5, 2007 18:28 EST