At a Congressional hearing of the House Financial Services Committee on Tuesday, speakers explored ways to clear up the subprime mortgage mess.

ARMs (Adjustable Rate Mortgages) have fueled the foreclosure increase when, after the initial fixed part of the loan ends, rates balloon into payments borrowers can no longer afford.

In addition to setting up a rescue fund for borrowers who face short-term problems due to illness or job layoff, recommendations included establishing a bond fund to help pay for borrowers switching out of their ARMs and into traditional fixed-rate mortgages. In cases where consumers fall victim to predatory lenders, the government would refinance loans through Fannie Mae.

Lenders may be willing to go along with these recommendations due to the cost of foreclosures. Typically, a bank loses money on a foreclosure because of costs involved in keeping the house on the books, maintenance and sales commissions. Additionally, houses that have been foreclosed upon sell for less than market value.

Panelists at the hearing included spokesmen for the FDIC, HUD, Fannie Mae and Freddie Mac, various consumer groups and lenders.