Stock analysts say mortgage plan only delays pain

By Dan Wilchins - Analysis

NEW YORK (Reuters) - Equity investors cheered news that the Treasury Department is working on a plan with mortgage industry leaders to save struggling homeowners from foreclosure, but analysts said it will not completely save banks from home loan pain.

Shares of a major bank index, the Philadelphia KBW Bank Index .BKX, rose 3.1 percent on Friday, after sources said the Treasury and lenders are putting the final touches on the plan and could announce details as soon as Wednesday.

The move signals the government is paying attention to difficulty in the housing and mortgage market, where foreclosures are surging and home prices are dropping.

"There's a growing feeling that Washington is not asleep at the switch," said Ray Soifer, chairman of Soifer Consulting, which consults the banking industry.

At issue are many subprime loans that feature low initial "teaser" rates for borrowers, but reset to much higher rates after two or three years. The Treasury's plan involves freezing borrowers' interest rates before they reset higher.

But many analysts note that renegotiating terms for loans will just postpone the inevitable -- writing them off. A few extra quarters of payments is a positive, but in the end, the loans must be written down because they will not earn the expected return.

"If you're a bank and you made a loan at a teaser rate because you wanted a higher rate longer-term, you're not going to get it now," said Robert Albertson, chief strategist at Sandler O'Neill & Partners in New York.

The Treasury's hope is likely that banks can forestall writing down too many mortgage-related assets, while economic growth in other sectors accelerates, allowing banks to generate higher profits and rebuild capital, analysts said.