U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks and other lenders to limit the surge in foreclosures by fixing interest rates on loans to subprime borrowers, people familiar with the Thursday meeting said, Bloomberg News reported.

"We've all agreed that there should be some sort of standardized approach to reaching more homeowners faster," U.S. Treasury Department spokeswoman Jennifer Zuccarelli told The Associated Press.

Subprime mortgages worth about $362 billion are expected to reset to higher interest rates in 2008, according to BusinessWeek magazine.

Market chatter Friday speculated on the plan's form, with no consensus readily emerging so far. Some Wall Street analysts expect Paulson's plan to focus on middle-income loans, excluding higher-income borrowers on the belief that they will able to obtain better terms themselves, and excluding lower-income borrowers who would not be able to afford their mortgage, even after a refinancing. Other analysts suggested that the plan may be more encompassing -- "capping" or limiting interest resets to predetermined rates.

Paulson will address a housing conference on December 3. The Treasury secretary led a one-hour meeting Thursday at the U.S. Treasury Department in Washington with federal regulators, bankers and lobbyists. Citigroup (NYSE: C), Wells Fargo (NYSE: WFC) and Washington Mutual (NYSE: WM), executives attended, said a person present, who spoke on condition of anonymity, Bloomberg News reported.

Economic Analysis: Place this one under the category of "We'll believe it when we see it." If it comes to fruition, this would be, arguably, the best Christmas and Hanukkah present the U.S. economy and subprime mortgage borrowers could receive. Currently, lenders face the prospect of seeing many subprime loans default or seeing fewer subprime loans default. Free-market purists will argue that the Treasury should not broker or intervene in private mortgage markets. As a rejoinder, Treasury plan supporters can argue that the Treasury is not imposing a solution on any organization: ultimately it's up to the lenders to determine if it's in their interest to negotiate or let many of these subprime loans go bad.

But let no one conclude incorrectly: the Treasury's plan will not jump-start the housing sector -- far from it. The housing sector recovery will take several years. The Treasury plan will, however, help stem the spiral of defaults-leading-to-lower-housing-prices-leading-to-more-defaults -- a vicious cycle that has to be broken before any meaningful housing recovery can occur. If the Treasury's plan can achieve that, it will represent a step forward for the U.S. economy, for lenders, and for homeowners.