updated 4/18/2007 1:48:13 PM ET 2007-04-18T17:48:13

Washington Mutual Inc. said Wednesday it will refinance up to $2 billion in subprime mortgages to help borrowers avoid default and foreclosure.

The program will allow subprime borrowers who remain current on their existing loans and are bracing for payment increases to apply for discounted fixed-rate loans or other refinancing options.

“Stepping up and helping our customers stay in their homes is in the best interest of our borrowers, our communities and WaMu,” Kerry Killinger, chairman and chief executive of the Seattle-based savings and loan, said in a statement.

Home-mortgage delinquencies and foreclosures have risen sharply in recent months, particularly for subprime mortgage customers who pay higher interest rates because of shaky credit or low income.

Subprime loans make up about 6 percent of Washington Mutual’s asset portfolio, but dealt a heavy blow to the company’s latest quarterly earnings.

On Tuesday, Washington Mutual reported a 20 percent drop in its first-quarter profits, blaming the slide largely on a $164 million loss on sales of subprime mortgages.

The company also raised its 2007 guidance for bad-loan provisions to a range of $1.3 billion to $1.5 billion, up from a range of $1.1 billion to $1.2 billion.

As housing prices continue to fall in many regions around the country, Washington Mutual has an interest in seeing borrowers repay rather than default because of the declining value of the collateral backing the loans. The Federal Reserve estimates that it costs a bank $50,000 to foreclose on a home.

Washington Mutual shares rose $2.23, or 5.6 percent, to $42.36 in morning trading on the New York Stock Exchange.

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