Mortgage rescue plan effect on builders unclear

By Ilaina Jonas

NEW YORK (Reuters) - A federally sponsored plan to rescue certain homeowners from foreclosure amounts to a federal bailout, and its effects could range from mitigating a crisis to creating a new one, real estate experts said on Friday.

"This would basically amount to a taxpayer bailout of dumb lending," said John Burns, founder of John Burns Real Estate Consulting which advises home builders and investment funds.

"It definitely does improve the outlook for housing, but it's not going to cause the housing market to turn around next year," he said.

"The problem for the home builders next year is the pending collapse with the resale market that they're going to have to compete with."

A meltdown of the U.S. subprime mortgage market -- loans given to people with weak credit -- helped fuel a global credit market crisis, bring down home values and leave investors reeling from mortgage-related losses.

It has also left home builders with huge inventories of homes and land, and slashed their profits.

Sources told Reuters on Friday that the Treasury Department was finalizing a plan with mortgage industry leaders that would freeze interest payments for many subprime borrowers facing higher mortgage rates and possible foreclosure.

Word of the proposed plan helped send home builders' shares soaring. Beazer Homes USA (BZH.N) closed up 15 percent at $8.49 on the New York Stock Exchange. Standard Pacific Corp (SPF.N) shares closed up 19.3 percent at $3.46. D.R. Horton Inc (DHI.N) shares rose 14.3 percent at $11.97, and the benchmark Dow Jones U.S. Home Construction Index .DJUSHB, rose about 9 percent.

LIMITED MORTGAGE RELIEF SOUGHT BY SOME

The housing boom of the past few years was fueled partly by the availability of adjustable-rate mortgages, which offered borrowers low rates for the first two or three years of their mortgage. The mortgages were then reset to much higher interest rates.

Adjustments to those higher rates have contributed to the vast number of defaults and foreclosures on homes with subprime mortgages.

Many lower-rate mortgages made at the height of the housing boom in 2005 are scheduled to be adjusted higher in 2008.

Mortgage industry representatives want to limit mortgage relief to borrowers who have a proven record of making payments under the initial rates.

Raymond James & Associates analyst Buck Horne said the plan could hurt home builders in the long run by eliminating adjustable-rate mortgages, which provided funding for a large chunk of buyers during the recent housing boom.

"What we're scared of is we go back to the 1960s and that the only product available is a 30-year fixed rate mortgage," Horne said.