News & Analysis This Month/Supplement - On Mortgage Relief, Who Gains the Most?

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WASHINGTON, Dec. 6 — At least one thing is clear about President Bush’s plan to help people trapped by the mortgage meltdown: it is an industry-led plan, not a government bailout.

Although Mr. Bush unveiled the plan at the White House on Thursday, its terms were set by the mortgage industry and Wall Street firms. The effort is voluntary and it leaves plenty of wiggle room for lenders. Moreover, it would affect only a small number of subprime borrowers.

The plan was the target of criticism from consumer advocates who said its scope was too narrow, and from investment firms, who said it went too far. Others warned that the plan, by letting some stretched homeowners off the hook, could encourage more reckless borrowing in the future.

“The approach announced today is not a silver bullet,” said Treasury Secretary Henry M. Paulson Jr., who hammered out the agreement. “We face a difficult problem for which there is no perfect solution.” The heart of Mr. Bush’s plan is a cautious attempt to help troubled homeowners by persuading financiers to freeze mortgages at low introductory rates for five years, but without actually forcing the hands of lenders and investors who hold the mortgages.

One of the financial industry’s lead negotiators estimated that at most 20 percent of subprime borrowers whose payments will increase sharply over the next 18 months — 360,000 out of 1.8 million people — would qualify for rapid consideration of a special five-year freeze on interest rates.

The number of people who actually obtain help would be smaller, because each borrower would face tests aimed at weeding out those considered too hopelessly in debt and those who make too much money to justify relief.

In one curious twist, the plan could eliminate many who have good credit scores or managed to improve their credit scores, because the good ratings would be a sign they do not need help.

“Talk about moral hazard,” remarked Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. “We’ve all told people, don’t go any more deeply into debt. Now we’re saying that people who go more deeply into debt will have an advantage over people who don’t go more deeply into debt.”

The administration’s theory is that there is a “sweet spot” in the market where it makes more financial sense for lenders to offer some relief than it does to foreclose on homeowners.

Most analysts agree there is a sweet spot of some sort. Investors typically lose 40 percent or 50 percent on homes that go into foreclosure, and the cost of shielding borrowers from a big jump in rates can be much less.

“I think there is a sweet spot,” said Bert Ely, a banking consultant in Alexandria, Va. “But I worry that the sweet spot is much smaller than people think it is. And as housing prices continue to decline and debts pile up, I fear the sweet spot will shrink.”

Administration officials estimate about 500,000 subprime borrowers are in danger of losing homes in the next 18 months as their low teaser rates expire and their monthly payments jump by 30 percent or more. Outside analysts warn the number of foreclosures could be much higher.

The Mortgage Bankers Association reported that the number of new foreclosure proceedings hit a record in the third quarter and that the delinquency rate on mortgages climbed to the highest level since 1986. The biggest problem, according to the survey, was in subprime loans, which are typically made at higher interest rates to people with shaky credit records or weak incomes.

But Mr. Paulson and the president’s other top economic advisers have remained staunchly opposed to anything that resembled a government-financed bailout for people who took out foolish mortgages or investors who bought the mortgages.

As a result, administration officials have walked a narrow line. They have held meetings bringing together mortgage-servicing companies and groups representing investors holding mortgages.

Instead of pressuring the industry to come up with specific relief, Mr. Paulson pushed the players to come up with a streamlined approach for deciding when to modify loan terms.

But Tom Deutsch, deputy director of the American Securitization Forum, which represented investment funds in the negotiations, made it clear that any rate freeze would be strictly voluntary and based on what investors decided was in their self-interest.

“This is not a government bailout program,” Mr. Deutsch said. “This is an industry-led framework for providing the best market standards and practices. There is no mandate here.”

President Bush and other top administration officials emphasized that the plan could help as many as 1.2 million subprime borrowers — about two-thirds of all people with subprime loans.

But that estimate covers hundreds of thousands of borrowers who are believed to qualify without any extra help for cheaper conventional mortgages, like those insured by the Federal Housing Administration.

Nonprofit housing groups that try to help troubled homeowners renegotiate mortgages were underwhelmed by Mr. Bush’s plan.

The Greenlining Institute, a housing advocacy group in California that began raising alarms about subprime loans nearly four years ago, estimated that only 12 percent of all subprime borrowers and only 5 percent of minority homeowners would benefit from the rate freeze. The Center for Responsible Lending, a nonprofit group that supports homeownership, said the freeze would help only about 145,000 people.

“This grossly inadequate plan is likely to harm the president’s desire to close the minority homeownership gap and create an ownership society,” said Robert Gnaizda, general counsel for the Greenlining Institute.

Some Wall Street analysts were equally unenthusiastic. “This plan only really amounts to a set of recommendations for lenders that is sure to meet some resistance from investors” in the mortgage-backed securities, wrote Paul Ashworth, an economist at Capital Economics.

Indeed, there were rumblings of rebellion among some institutional investors. “Why would anybody in his right financial mind agree to a five-year price freeze, especially when we’re staring in the face of possible inflation?” asked Roger W. Kirby, managing partner at Kirby McInerney, which has represented investors in class-action lawsuits over securities. “Mr. Paulson has overestimated the generosity of people on Wall Street.”