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The statistics are chilling. As many as 2m adjustable-rate subprime mortgages, worth $350 billion, are due to reset to higher interest rates in America over the next 18 months. Resets on Alt-A (or near-prime) loans will continue to climb until late 2010. House prices are tumbling. What can be done to avoid a bloodbath of defaults?

Enter the Gubernator. Galvanised by the fact that a quarter of all resets will come in his state, Arnold Schwarzenegger, California’s governor, has struck an innovative deal with four big loan servicers. This will see the companies extend by several years the period for which thousands of borrowers can stay at the initial “teaser” rate. Crucially, the four have agreed to “fast-track” their procedures to make it easier to include whole swathes of struggling but not hopeless borrowers.

Washington is throwing its weight behind this kind of mass loan modification. Bank supervisors have urged servicers—who collect mortgage payments and pass them on to investors—to work out new deals with borrowers. The Federal Reserve’s Randall Kroszner has encouraged the industry to explore efforts to help large groups of borrowers. Henry Paulson, the treasury secretary, has come round to the same view after concluding that servicers lack the resources to deal with case-by-case modifications. “We are going through uncharted territory,” he says.

The boldest suggestion has come from Sheila Bair, chairman of the Federal Deposit Insurance Corporation, a guarantor and supervisor. The crisis is so grave, she argues, that most borrowers who are facing resets but still paying their dues should be given the chance by servicers to switch into fixed-rate loans at the starter rate for the full 30 years.

Some are hoping that the Californian experiment, which builds on Ms Bair’s proposal, will provide a template for a nationwide scheme—if the economics work. They may well. Foreclosure is expensive, typically eating up 20-25% of the loan balance, says Joseph Mason of Drexel University. Modification means smaller cash flows but also fewer defaults. Handling each case separately can be costly, too. Loan servicing is about transaction-processing, not customer service, points out Guy Cecala of Inside Mortgage Finance, a newsletter. Analysing borrowers case by case requires beefing up work-out departments. Mass modification is less labour-intensive and thus, for an industry with wafer-thin margins, more appealing.