Dec. 1 (Bloomberg) -- Treasury Secretary Henry Paulson said he's moving ``fast'' in seeking a solution to the subprime crisis as securities-industry lobbyists warned against any deal that weakens the $7.1 trillion mortgage-bond market.

Paulson, who led a meeting of bankers and regulators Nov. 29, is negotiating an agreement to fix interest rates on some troubled loans. He's seeking to stem a wave of foreclosures that threaten to drive the U.S. economy into recession next year.

``The No. 1 risk of across-the-board loan modification is losing investor confidence in mortgage backed-securities markets,'' Tom Deutsch, deputy executive director of the American Securitization Forum, said in an interview in Los Angeles yesterday. ``If they no longer invest in mortgage-backed securities, you cut off the credit available for refinancing, you cut off the lifeblood of being able to give better loans.''

The comments suggest some differences between investors and regulators over how long lenders should freeze rates and what conditions must be met before a borrower qualifies for relief. An accord may come as soon as next week, said a person familiar with the talks. Paulson addresses a housing conference on Dec. 3.

The Forum, whose members include Goldman Sachs Group Inc. and Citigroup Inc., was represented at the meeting with Paulson. The group lobbies for investors, traders, underwriters, accounting firms, ratings companies and other institutions involved in the creation and sale of mortgage-backed securities.

`The Challenge'

``The investors are the people who are ultimately going to either lose money because the loan doesn't get paid or because a lesser amount gets paid on the loan,'' said Oliver Ireland, a partner at Morrison & Foerster LLP in Washington and a former associate general counsel at the Federal Reserve. ``The challenge here is to make sure that somehow you create workouts that the ultimate investors can agree to.''

Adjustable-rate subprime loans were typically sold with low rates for the first two or three years and then reset at a higher rate for the duration, usually another 28 years. Defaults on the loans, some of which were the product of what Fed officials called ``lax'' lending standards, climbed to a record this year.

That's likely to worsen as more than 1.5 million nonprime mortgages valued at $331 billion will reset by the end of next year, according to the Federal Deposit Insurance Corp.

``We're moving as fast as we can move,'' Paulson told ABC News in an interview posted on its Web site. ``We believe that the biggest issue is gonna be beginning next year when the number of resets is going to be increasing dramatically.''

`Financial Capability'

He stressed no government money will be involved. Homeowners who can afford an increase on their mortgages, as well as those who don't ``have the financial capability to own a home'' won't be offered a ``freeze'' on their interest rates, Paulson said.

Three months ago, regulators asked lenders to work with borrowers to minimize foreclosures. They have been disappointed by the results. ``It would behoove the industry to go further than it has,'' Fed Governor Randall Kroszner said at a forum yesterday in Philadelphia.

Treasury lacks authority to rewrite mortgages and the contracts underlying mortgage bonds, so Paulson must coax support for an agreement from bondholders and servicers responsible for channeling payments from borrowers to bond investors, analysts said.

``The government can't impose, by fiat, changes in servicing policies'' for the bonds, said Daniel Nigro, who manages asset-backed securities in New York at Dynamic Credit Partners, which has about $6 billion under management. ``The servicer can't impose broad-brush modifications without examining each loan in more detail,'' he added.

Market Size

Sales of bonds backed by subprime mortgages grew to $450 billion last year from $95 billion in 2001, according to the Securities Industry Financial Markets Association, a New York- based trade group. If the rates on the mortgages are fixed at lower cost, the value of the bonds may drop.

``Will investors go along with this plan?,'' Democratic Senator Charles Schumer of New York said in a statement. ``If not, can they be compelled to?''

Lawmakers plan to examine the issue when House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, holds a hearing Dec. 6. Frank said in a statement yesterday he was ``encouraged by reports of progress'' and stood ``ready to work'' with Paulson should legislation be needed.

Stocks climbed yesterday on speculation Paulson's efforts may slow credit losses. They also gained after Fed Chairman Ben S. Bernanke said ``renewed turbulence'' in markets may hurt growth, reinforcing anticipation of a rate cut this month. The Standard & Poor's 500 stock index rose 0.8 percent to 1,481.14.

Bill's Impact

Frank has cosponsored a bill that would bypass lenders and bondholders by allowing bankruptcy judges to change loan terms and avert foreclosure.

``Voluntary loan modifications under regulatory duress is a softer version of the `cram down' bankruptcy bill being considered in the House,'' said Andy Laperriere, an analyst at International Strategy and Investment in Washington. ``If the voluntary loan modification approach doesn't produce the hoped- for results, Treasury may be paving the way politically for the bankruptcy bill.''

To contact the reporters on this story: James Tyson in Washington at jtyson@bloomberg.net.

Last Updated: December 1, 2007 00:03 EST