Amid escalating loan defaults and foreclosures, the Bush administration had until recently said lenders and borrowers should work out new loan terms on their own and not expect the government to step in.

But that changed abruptly last week as Treasury Secretary Henry Paulson convened lenders, investors and others to discuss freezing interest rates for some borrowers in hopes of staving off foreclosures. Details of the plan are expected to be announced this week.

As recently as Oct. 10, Paulson told reporters that he opposed the idea of modifying loans by broad category. The administration had held steadfast to this view, despite complaints by consumer activists that many borrowers had signed for loans that were doomed to fail when they reset at higher rates in the future.

The previous posture was consistent with the administration's strong free-market views and general wariness toward government intervention in the private economy.

But recent developments transformed the picture, observers said, suggesting that fallout from the mortgage markets was spreading. Lenders are making fewer loans, further cooling the housing market. That in turn is weakening consumer spending and is expected to cut into job growth.

The mounting damage helped spur a sharp Nov. 26 sell-off on Wall Street, moving the major stock market indexes into "correction" territory before beginning a rebound the next day.

"I think the capital-markets issue hit them in a way that the problems of individual homeowners and community devastation did not," said Ellen Seidman, former director of both the Office of Thrift Supervision and the Federal Deposit Insurance Corp., who now heads a New America Foundation financial education project. ...

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