April 17 (Bloomberg) -- Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans, pledged today to help delinquent subprime borrowers refinance into more affordable mortgages and avoid foreclosure.

Government-chartered Fannie Mae plans to encourage 2,000 lenders to help borrowers refinance from subprime loans that reset to higher monthly payments into fixed-rate mortgages lasting up to 40 years, Chief Executive Officer Daniel Mudd said in written testimony prepared for the House Financial Services Committee in Washington.

``The best way to influence the subprime market, and be part of the solution, is to stay engaged and provide funding for conventional loans to these borrowers that are affordable over the long term,'' Mudd said.

The House hearing is the latest effort in Congress to curb the surge in mortgage delinquencies and foreclosures among subprime borrowers, or people with poor or incomplete credit records. Representatives of the Federal Deposit Insurance Corp., the Federal Housing Administration, the mortgage industry and consumer groups were also scheduled to testify.

Stabilizing Loans

Freddie Mac plans this summer to offer subprime borrowers more ``stable'' financing, including fixed-rate loans of as long as 40 years and adjustable-rate mortgages with longer fixed-rate periods, Chief Executive Officer Richard Syron said his written House Financial Services Committee testimony.

Lenders provided mortgages to borrowers unqualified for loans ``at any price,'' Syron said. ``Many subprime borrowers may find themselves unable to refinance out of mortgage products that have become extremely burdensome.''

Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, created by Congress to increase financing available to homebuyers, channel money into the mortgage market by buying home loans from lenders. They profit by holding mortgages and mortgage bonds as investments and by charging a fee to package together home loans as securities for sale to investors.

Late payments on subprime loans reached a four-year high of 13.3 percent in the fourth quarter, while foreclosures on all home loans also set records, according to the Mortgage Bankers Association.

FDIC Chairman Sheila Bair said subprime borrowers may avoid foreclosure if they are able to refinance their loans to traditional products such as 30-year fixed-rate mortgages.

``Restructuring would allow them to stay in their homes, repair their credit histories, and dampen the impact that foreclosures could have on the broader housing market,'' Bair said.

Ohio Experience

Some borrowers will be more difficult to help than others. A program for Ohioans in which Fannie Mae offers to buy refinance mortgages for victimized borrowers has only ``rescued'' 42 of the 508 people who've applied, Representative Marcy Kaptur, an Ohio Democrat, said in a statement. Many consumers were locked out because they owed more than their homes were worth after inflated appraisals, Kaptur said.

The program, which began in 2003, involves Fannie Mae buying a first mortgage for 80 percent of the home's value, with a second mortgage for typically as much as another 30 percent coming from the development agency, said Keith Foster, director of enforcement and compliance at the Toledo Fair Housing Center, which refers consumers to the program.

Getting the company collecting loan payments to forgive the rest of the existing loan is usually difficult, especially if the borrower hasn't yet fallen behind while struggling with other debt, Foster said, partly blaming securitization.

``We're kind of frustrated,'' he said. ``We'd like to help more people.''

Statement to Banks

The FDIC and other federal bank regulators issued a statement to banks today urging them to find more affordable alternatives for borrowers struggling to keep up with payments on their adjustable-rate mortgages.

The FDIC, the Federal Reserve and other U.S. regulators on March 2 proposed subprime mortgage lending guidelines that would direct banks to offer clearer information to borrowers and ensure they can repay their loans.

Congress is also considering a legislative fix.

House Financial Services Chairman Barney Frank, a Massachusetts Democrat, said lawmakers should consider what is needed to curb the problem in the future and to help communities that are already suffering from multiple foreclosures.

Legislative Options

``These kinds of loans are not randomly geographically distributed,'' Frank said, explaining why Congress needed to get involved. ``The victims when some of these loans go bad are not just the individuals but the neighborhoods and cities in which these individuals live.''

Frank has also discussed legislation that would shield borrowers from ``predatory'' lenders, prevent lending discrimination and require lenders to offer plain-English disclosure of key loan terms.

Last week a group of senators led by New York Democrat Charles Schumer proposed a government bailout for subprime borrowers facing foreclosure.

Opposing `Bailout'

A bailout for subprime borrowers wouldn't be the best use of government dollars, said Representative Spencer Bachus of Alabama, the senior Republican on the committee.

``I can't agree to taking taxpayers' money and addressing this problem,'' Bachus said.

Freddie Mac's Syron also cautioned against a borrowers' bailout. Such a policy ``could have lasting, unintended consequences that harm the housing finance system in the long term,'' he said. ``The ability to enforce a mortgage contract, including the use of foreclosure, is critical to continued investor confidence in the U.S. housing market.''

A government-funded bailout is ``unlikely,'' Frank told reporters after the hearing.

``Basically, what you're going to have is a recognition that many of the holders of these securitized entities have an interest in not foreclosing,'' Frank said.

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

Last Updated: April 17, 2007 15:23 EDT