WASHINGTON - U.S. Treasury Secretary Henry Paulson said on Monday he hoped to have a mortgage relief plan ready by week's end and urged Congress to give local governments more borrowing power to ward off foreclosures.

The Bush administration is seeking agreement with the mortgage industry to freeze interest rates on subprime loans whose rates are about to reset sharply highly in the hope that many of these borrowers can stay in their homes.

In addition, the administration is pressing Congress to take others steps it argues would ease strains in the U.S. housing market.

"Today, we are proposing to allow state and local governments to temporarily broaden their tax-exempt bond programs to include mortgage refinancing," the U.S. Treasury chief told a housing conference sponsored by the Office of Thrift Supervision.

Paulson has been pushing Congress on other measures, including modernizing the Federal Housing Administration and government-sponsored enterprises like Freddie Mac and Fannie Mae that play key roles in keeping the flow of mortgage funds going.

In the past week, Paulson has met U.S. lending regulators and executives from several sectors of the mortgage industry to develop a plan to help subprime borrowers - people with spotty credit records who were able to get mortgage loans during the boom years of the 1990s and early 2000s but now face a squeeze.

"We are determined to bring this diverse group together, to develop a set of standards that will be implemented across the industry, from the largest mortgage servicers to the smaller specialty servicers," Paulson told the National Housing Forum.

"An industry-wide approach is critical to the effectiveness of this effort," he added.

OTS Director John Reich said U.S. banking regulators were largely in agreement on a proposal to modify mortgages for subprime borrowers.

"I believe there is general agreement among the regulators," Reich told reporters before the start of the forum.

Fannie Mae Chief Executive Daniel Mudd, speaking on a panel at the forum, said he was supportive of the proposal spearheaded by the Treasury. He also said Fannie Mae, the largest provider of financing for U.S. home mortgages, has eased terms on some $10 billion in subprime loans to help homeowners faced with foreclosure.

ECONOMY SOUND

Paulson said "some penalty" will be paid by the U.S. economy because of the damage that has been caused in housing markets, where home prices have fallen and inventories of unsold homes have piled up and put a further brake on construction and sales.

But in a subsequent interview on Bloomberg Television, he stressed that the economy was fundamentally sound and was dismissive of a rising chorus of fears from Wall Street analysts that risks of a recession were escalating sharply.

"We have a fundamentally sound, healthy economy and I believe it is going to keep growing," Paulson said, while reiterating "a strong dollar is in our nation's interest."

He declined to specify how many homeowners might be helped by whatever relief plan is eventually unveiled and underlined that it would not be a comprehensive solution for a problem that stemmed in part from sloppy business practices.

"This is not a silver bullet. This plan, in and of itself, is not going to deal with all of the problems associated with the housing market and bad lending practices," he said.

More than two million subprime borrowers are estimated to be facing higher mortgage costs and the possible loss of their homes if they cannot meet new, higher payments that will come into effect when their mortgages reset at higher rates.

Mounting mortgage foreclosures have spooked financial markets around the globe in recent months. Many sinking loans were repackaged as securities and sold to investors around the world, who now are scrambling to get a handle on the value of their assets.

In an ABC Television interview last week, Paulson said the Treasury was aiming to craft an initiative that will help the "middle group" of borrowers who have the financial ability to own a home but could not survive a big interest rate increase.

"We're focused on those in the center... that are going to have a problem meeting their payments," he said. Doing so means persuading lenders, servicers, investor groups, regulators and other parties to negotiate with each other, a role that Paulson seemed willing and eager to facilitate.

Many of the plan's details will rest with the outcome of the talks between the mortgage industry and investors, the two groups that will have to absorb its costs.

"The message is that everybody has to get on the bus," a source told Reuters on the weekend, speaking about Paulson's efforts to broker a compromise plan.