Subprime plan could help 1.2 million

WASHINGTON -- Treasury Secretary Henry Paulson announced on Thursday details of a plan to freeze interest rates on hundreds of thousands of subprime mortgages, hours after new data showed a record number of homeowners went into foreclosure in the third quarter. None of them will be eligible for financial relief under the proposal.

Nearly one in five homeowners with subprime adjustable-rate loans — around 600,000 borrowers — were in default in the July-September quarter. But the rescue deal forged by regulators and the mortgage industry is designed to help 1.2 million who have subprime ARMs that would reset to higher rates starting next year through mid-2010.

The plan won't help borrowers with prime ARM loans, either. Those loans accounted for nearly 19% of foreclosures begun in the third quarter — another record high. That figure is expected to surge even further in the next two years as more of those loans reset to higher rates. The pain will be particularly severe in California and Florida, which accounted for 42% of the new prime ARM foreclosures last quarter.

The administration's plan "will make a difference," Paulson said. "It will reduce the number of avoidable foreclosures.

"This is not a silver bullet," he acknowledged.

The mortgage industry estimates that half of those eligible will have their rates frozen; the other half should have the financial strength to refinance into a fixed-rate loan.

But Mark Zandi, chief economist for Moody's Economy.com, estimates that only about one-third of the eligible borrowers will be saved, because the plan faces legal and logistical hurdles. Resistance from investors and the plan's tough qualifications could limit its success.

The alarming pace of foreclosures is threatening to send the real estate market deeper into recession and drag the economy down with it. After one of the most spectacular booms in history, fueled by flagrantly imprudent lending, the real estate market is suffering the biggest correction since the Great Depression, Zandi says. Home prices this year will post their first average annual drop since World War II, and will drop again next year, the Mortgage Bankers Association projects.

"We expect the housing market, broadly defined, to bottom out in late 2008, no earlier than the third quarter, because of the substantial inventories" of homes for sale, said Doug Duncan, the MBA's chief economist.

A national 24-hour hotline exists for borrowers in financial trouble: 888-995-HOPE. But some credit counselors, already overwhelmed with calls, complain that loan-servicing companies lack the staff to handle the crushing caseload.