Dec. 7 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson's plan to prevent as many as 1.2 million people from losing their homes by freezing interest rates on subprime adjustable-rate mortgages will bring no benefit to the depreciating housing market.

``At best, it may stop some of the hemorrhaging of the housing market, but it doesn't necessarily turn things around,'' said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies in Cambridge, Massachusetts. ``The fundamental problem with housing is oversupply.''

Existing home prices may fall as much as 15 percent by 2009 from their peak last year, even if interest rates are frozen on one fifth of 2006 subprime loans resetting next year, said Mark Zandi, chief economist at Moody's Economy.com, a unit of New York-based Moody's Corp. About 2.8 million mortgage loan defaults will occur in 2008 and 2009, Zandi said in Dec. 5 testimony before the U.S. Senate Judiciary Committee.

President George W. Bush agreed yesterday to a plan led by Paulson that freezes interest rates on some subprime mortgages for five years. The agreement focuses on borrowers who will fall behind on payments as low rates reset at higher levels.

``It's long overdue that someone puts something on the table that's enforceable and real and not just a press release,'' said Prentiss Cox, a former assistant Minnesota attorney general who prosecuted predatory lending cases. He's now an associate professor of clinical law at the University of Minnesota in Minneapolis.

Rising Defaults

Paulson's plan is being introduced as the number of Americans who fell behind on their mortgage payments rose to a 20-year high in the third quarter, the Washington-based Mortgage Bankers Association said in a report yesterday.

Analysts at Credit Suisse Group estimate more than 30 percent of borrowers with subprime adjustable-rate mortgages are behind on their payments before their loans reset higher and 775,000 homes with $143 billion of mortgage debt will go into foreclosure through the middle of 2009. The forecast was made before Paulson's plan was disclosed.

``It'll be the biggest housing recession we've known,'' said Allen Sinai, chief global economist at New York-based Decision Economics Inc. ``Even if we figure this part of it out, we are not through it.''

Wary Buyers

The government-led initiative may ``reduce the severity of the decline,'' said Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University in New Haven, Connecticut. Still, ``if past cycles are a guide, we could have weak or declining markets for five to 10 years,'' Shiller said.

Sixty-one economists said in a letter to Congress yesterday that they oppose the Paulson plan and urged ``against excessive new regulations or federal interventions as a response to current trends in the housing market.'' The economists sent the letter with FreedomWorks, a non-profit group that supports less government and lower taxes. Its chairman is Dick Armey, a former Republican representative from Texas and House majority leader.

Demand for homes at Toll Brothers Inc. won't recover until consumers regain confidence and buyers see evidence prices aren't falling, Chief Executive Officer Robert Toll said in a Dec. 3 interview. The company is the largest U.S. builder of luxury homes.

Equilibrium Needed

``Right now I think it takes a brave soul to buy a home because there's so much chatter about housing prices dropping,'' Toll said. ``As soon as that fear leaves the market and we have some kind of equilibrium, we'll be back on top.''

Toll Brothers, based in Horsham, Pennsylvania, has lost about $5 billion of market value since July 2005, when new home sales peaked in the U.S. Since then, they have dropped 48 percent. Yesterday, the company reported its first quarterly loss in 21 years and said the housing slump is the worst the company has seen in decades.

Homebuyer confidence may be helped ``at the margin'' by the Paulson plan, said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management who helps oversee about $200 billion.

``Rather than real impact, it may cause people to settle down and free up capital flow,'' Paulsen said. ``It could have that kind of benefit. I'm not sure the real fallout will be that much different.''

Home Prices Fall

Zandi estimates new and existing home sales will bottom at an annualized rate of 5.25 million units in early 2008 from a peak of 8.5 million homes in mid-2005. New home sales are projected to fall 13 percent in 2008, according to estimates from the National Association of Realtors in Chicago.

U.S. home prices declined for the first time since 1994 in the third quarter as foreclosures increased and lenders tightened mortgage requirements, the Office of Federal Housing Enterprise Oversight reported on Nov. 29.

Part of the success of the Paulson plan may hinge on loan- servicing companies' ability to handle the workload of modifying terms of existing mortgages, Zandi said. Mortgage service companies are authorized to negotiate with borrowers, though so far only about 1 percent of loans surveyed by Moody's Investors Service have been changed.

``It's only recently that Washington has focused on the fact that the critical players in making this kind of remedial program succeed are the investors as opposed to the banks,'' said H. Peter Haveles Jr., a New York-based partner at the law firm Arnold & Porter LLP, who represents investment banks and mortgage companies in regulatory investigations and civil litigation.

Subprime borrowers face an average mortgage increase of 26 percent, or $400 a month, because of higher rates, according to data compiled by Santa Ana, California-based First American CoreLogic, a unit of the biggest U.S. title insurer.

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net.

Last Updated: December 7, 2007 00:15 EST