Subprime savior plan thorny for investors

By Al Yoon - Analysis

NEW YORK (Reuters) - A sweeping plan supported by the Bush administration to curb housing foreclosures has drawn only cautious support from the investors whose cash financed the housing boom.

The proposal, expected to be worked out between major mortgage lenders and the Treasury and finalized in the coming days, comes amid increasing political pressure to stop foreclosures from exacerbating the two-year housing slump and tipping the economy into recession.

By freezing adjustable interest rates before they become fixed at a higher level, the plan may curb defaults that have shredded the confidence of credit markets worldwide.

But it could reach too far and halt payments on high interest rate loans and undermine investors who took risks for their subprime lending and expected to get paid for it. It is also too early for many investors to judge the plan without knowing the details.

"You might end up benefiting borrowers who are perfectly capable of making payments," said Ajay Rajadhyaksha, head of fixed-income strategy at Barclays Capital in New York. "I'd be surprised if every investor out there agreed to give servicers carte blanche" to freeze interest rates, he said.

What's more, most subprime borrowers in arrears are defaulting due to fraud or poor underwriting, and not because of higher payments due to scheduled rate increases, he said. Freezing rates may only buy time for the borrower instead of preventing foreclosure.

Such arguments may fall on deaf ears, however, since the housing market has become a top priority for lawmakers frustrated that state and federal efforts to help borrowers have had little effect so far.

Sen. Charles Schumer, a New York Democrat and head of the housing panel of the Senate Banking Committee, on Friday praised the Bush administration for stepping up efforts to help homeowners. He turned the spotlight instead on investors, asking hypothetically if they could be compelled to comply.