Henry Paulson, the US Treasury Secretary, said yesterday that he was confident of securing an agreement with banks and regulators this week to freeze interest rates on high-risk sub-prime mortgages.

The proposed deal is designed to prevent an expected surge in mortgage defaults next year, but Mr Paulson gave warning that it did not represent “a silver bullet” to cure America’s home loans crisis. He described the scheme, which would extend the lower introductory rate on adjustable rate mortgages, as a pragmatic response to the worst housing crisis that America had experienced for 20 years.

“This plan . . . is not going to deal with all of the problems associated with the housing market and bad lending practices,” Mr Paulson said. However, he was confident that it would help to prop up the housing market and he was optimistic about America’s broader economic outlook.

“We have a fundamentally sound, healthy economy and I believe it is going to keep growing,” Mr Paulson said, while reiterating that “a strong dollar is in our nation’s best interest”. He believed that “the economy’s fundamental strength is going to be reflected in the currency markets”.

Mr Paulson said that he was “aggressively pursuing a comprehensive plan” because 1.54 million sub-prime mortgages, with a value of about $362 million (£175 million), were due to be reset at a higher rate next year.

An initial interest rate of about 7 per cent is charged on a typical sub-prime mortgage for the first two or three years. This is higher than mainstream home loans offered to more credit-worthy borrowers, but below the 9.5 to 11 per cent that sub-prime mortgage holders are charged when their introductory rate expires. The rise in the interest rate represents extra payments of several hundred dollars a month on an average mortgage and in many cases will push borrowers beyond their ability to repay.

Mr Paulson said that securing an agreement on repayment freezes had been a complicated process because many of the mortgages had been split into securities and scattered across the world. He said that he was talking to banks, regulators, investors and loan servicers, which collect payments from homeowners on behalf of debt holders.

Goldman Sachs, Citigroup, Country-wide Financial, Fannie Mae, Wells Fargo and Washington Mutual are among the parties most actively engaged in the talks.

Details still to be finalised are thought to include the length of the freeze, expected to run to between five and seven years, and who will qualify for it. The emphasis is to focus exclusively on those mortgage-holders who would be helped by a rate freeze. Those who it is believed would default anyway and those who would be able to maintain their payments would not be targeted.

Mr Paulson’s continuing tenure as Treasury Secretary has become the subject of speculation, with Wall Street rumours linking him to the vacant top job at Citigroup, although Vikram Pandit, head of the bank’s Institutional Client Group, is tipped to be the top internal candidate.

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