Subprime plan may be too little, too late

By Al Yoon and Lynn Adler - Analysis

NEW YORK (Reuters) - President George W. Bush's proposal to curb rising foreclosures may provide breathing room to hundreds of thousands of homeowners, but stops short of reaching the most troubled borrowers.

The plan freezes rates on certain subprime loans and comes amid news that foreclosures rose to a record high last quarter, and at a time when the world's biggest banks are reeling from losses on securities tied to risky mortgages.

The lasting impact on the housing markets is debatable since the current proposal may exclude more people than it helps, even as the plan takes a step toward slowing defaults.

"This is a hope and prayer plan," said Elizabeth Warren, a professor at Harvard Law School.

The "Goldilocks" plan filters out borrowers who are too poor to afford their mortgage now, and those who can meet their payments even at a higher rate, giving it a "smallness" that won't provide a long-term fix, she said.

Analysts cited by the Center for Responsible Lending have estimated some 1.7 million foreclosures will occur in next three years, as the combination of loose underwritings during the housing boom collide with home prices falling at their fastest rate in a quarter-century.

Even if freezing rates reduce that number, lingering concern about falling home prices could deter home buying and keep housing and capital markets in a deep funk, Warren said.

President Bush said the plan could potentially help 1.2 million homeowners, though housing-watchers such as Wharton School's Susan Wachter put the number in the "several" hundred thousands.

At the same time, soaring foreclosures reported by the Mortgage Bankers Association on Thursday is a reminder that the plan doesn't address the thousands that already lost their homes.

Alvin Clavon, 35, a South Los Angeles homeowner already served with a foreclosure notice after his adjustable-rate loan payments rose, watched the Bush announcement with frustration, asserting the plan is "too little, too late" for him, and will do more to help the lending industry.

"Why only help a few people?," Clavon asked. "Why not help the majority of the people?"

Treasury Secretary Henry Paulson was the first to admit the plan is no "silver bullet."

Authors of the plan say it will streamline the process of "modifying" loans, and reduce the foreclosures that depress home prices, disrupting a vicious cycle of pain for homeowners and the U.S. economy.

The timing is critical. Some prominent economists are placing 50 percent odds that the U.S. will slip into recession in 2008, greased by falling home prices.

The plan is part of "doing everything we can to mitigate the impact of the housing decline on the economy," Paulson said after the unveiling by President Bush.