Subprime plan may be too little, too late

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.

On a more local level, the hardest-hit states, such as Michigan, are already too far along in their house price corrections to take advantage of the program, analysts said.

A requirement that homeowners have at least a 3.0 percent equity stake is difficult since many loans were originated with zero down-payments, and prices in areas like Detroit have already fallen 10 percent or more in the year through September.

"The loans this plan won't reach will be heavily concentrated in those areas that are economically fragile right now," said Wachter, who is professor of real estate and finance at Wharton, at the University of Pennsylvania.

Local officials, not wanting to kick a gift horse in the mouth, were encouraged by the rate-freezing plan but sentiments of doubt laced some public comments.

Detroit's mayor, Kwame Kilpatrick, in a statement said the plan was a first step, but what was really needed was money to help rehabilitate neighborhoods devastated by foreclosures.

The pressure on the federal government to do more comes in part as lenders report slow progress on modifying mortgages, whether it be due to the complexities of staying true to contracts that govern securities backed by the loans, or the slow process of contacting each borrower, one-by-one.

Some mortgage servicers have said they never had contact with up to 50 percent of borrowers whose subprime loans were foreclosed, according to UBS Securities. If that is because borrowers committing a "soft fraud", such as misstating income, did not want to be contacted, the federal program will have no major impact, the UBS report said.

"We suspect this effort will have only a marginal impact on total modifications, and little impact on the coming foreclosure wave," they said.

(Additional reporting by Dana Ford in Los Angeles, Karen Pierog in Chicago and Patrick Rucker in Washington; editing by Clive McKeef)