By Benton Ives

Democratic leaders welcomed a White House proposal to freeze interest rates for certain struggling subprime borrowers, but some GOP lawmakers worried the proposal could further disrupt troubled housing markets.

The Bush administration plan — spearheaded by Treasury Secretary Henry M. Paulson Jr. — would allow loan services to freeze interest rate increases for five years on some adjustable rate subprime mortgages.

Millions of subprime borrowers are threatened with foreclosure as low initial loan payments reset to higher rates in the coming months.

Slated to be formally announced Thursday afternoon, the deal emerged from talks among regulators, loan servicers and investors who bought securities backed by subprime mortgages in secondary markets. Although participation would be voluntary, it appears to have the backing of major investment groups.

Speaker Nancy Pelosi , D-Calif., endorsed the basic concept Thursday.

“Aggressive action is needed,’’ Pelosi said. “I support what I know of the administration’s actions.”

Still, she said the administration effort comes “a little late,” noting that the House has already passed several bills aimed at ameliorating the mortgage crisis.

Pelosi also said she hoped that the House and Senate still can come up with a mortgage relief package to send to President Bush before Congress leaves on its holiday recess.

House Financial Services Chairman Barney Frank , D-Mass., also welcomed the announcement.

“It is a recognition that the increase in the rates would cause serious problems and that some public sector concern with that is appropriate,” Frank said.

But Frank hit the Senate for not moving quickly on legislation to overhaul the Federal Housing Administration and mortgage finance giants Fannie Mae and Freddie Mac.

“I have to say the increasing inability of the United States Senate to function is becoming a threat to governance, and that’s not partisan,” Frank said.

The office of Senate Banking Chairman Christopher J. Dodd , D-Conn. said he was not going to comment on the proposal before it is unveiled by President Bush.

Meanwhile, Rep. Spencer Bachus of Alabama, the ranking member of the Financial Services Committee, worried that a litigation backlash could follow.

“A change in the fundamental structure of our mortgage markets over the last 30 years has resulted in multiple parties to every mortgage contract,” Bachus cautioned.

On Sept. 18, the House passed an FHA bill (HR 1852) that could help some 200,000 families refinance into FHA-insured loans. Efforts to move a similar bill (S 2338) in the Senate have so far been stymied.

The House also passed legislation (HR 1427) on May 22 to overhaul regulation of Fannie Mae and Freddie Mac and increase their ability to provide capital for mortgages. Comparable legislation has yet to be introduced in the Senate, where any broad overhaul would face a difficult fight on the chamber’s floor.

White House proposal

The White House rate increase moratorium is aimed at helping homeowners, not speculative real estate buyers. It would offer relief for borrowers who were actually living in the home and making on-time payments at the low introductory rate, but would be threatened with losing their homes if the monthly payments reset to the higher rate.

It would cover loans originated between Jan. 1, 2005, and July 31, 2007, that reset between Jan. 1, 2008, and July 31, 2010.

Bachus expressed concern that it could be unfair to help some borrowers, while leaving borrowers who are able to make their payments to fend for themselves.

Rep. Scott Garrett , R-N.J., warned that “whenever the government interferes with the marketplace there is potential to create a so called moral hazard that can affect future economic decisions.”

At the same time, some Democrats complained that the Paulson framework won’t do enough to help, in part because it excludes borrowers who are late on their mortgage payments.

The plan is “only going to help a very, very small number of people,” said Rep. Maxine Waters , D-Calif.

Edward Epstein and Timothy R. contributed to this story.