Dec. 3 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson's negotiations with banks to freeze payments on certain subprime home loans will offer little aid to borrowers, Barclays Plc and UBS AG bond analysts say.

Paulson's plan is aimed at borrowers with ``steady incomes and relatively clean payment histories'' who are able to repay adjustable-rate loans only if their payments don't rise, he said today at a conference in Washington. In a later interview, he wouldn't ``put a number'' on how many loans would be affected.

Few homeowners may qualify for the proposed aid and many are likely to default even before rates reset higher, Barclays analysts wrote in a report today.

``The subprime reset plan, as it currently stands, is unlikely to be a big help,'' New York-based Barclays analysts Ajay Rajadhyaksha and Sharon Greenberg wrote.

Most borrowers who would be helped by the plan would have their loans reworked without a coordinated effort, UBS's Thomas Zimmerman wrote Nov. 30. Details of the Paulson proposal haven't been announced.

Subprime loans, given to people with poor or limited credit histories or high debt, typically offer a low introductory rate for the first two or three years. The rate then resets for the duration of the mortgage, usually 30 years. About 100,000 such loans will reset each month over the next two years, UBS says.

Servicers, the companies in charge of managing outstanding mortgages, won't necessarily do as many modifications as they should without government intervention, said Larry Litton Jr., president of Litton Loan Servicing LP in Houston.

`Part of the Crowd'

``There continues to be apprehension in the servicing world'' about whether modifying loans in securities before borrowers turn delinquent will lead to accounting problems or investor lawsuits, he said. ``Now, you're part of the crowd.''

His company, which oversees $46 billion of subprime or delinquent loans, modified 4,500 mortgages last month, including 2,000 whose borrowers were current. Litton's company is being sold by Credit-Based Asset Servicing and Securitization LLC for about to an unidentified buyer.

Only 12 percent of all securitized subprime adjustable-rate loans in California would qualify for fixed payments under a similar agreement between the state and four mortgage servicers last month, the Barclays analysts wrote, based on an announcement saying the deal applies to borrowers who occupy homes, have been making on-time payments and can't afford higher rates.

Home Price Declines

Assuming that half of subprime balances default or are repaid before rate resets, another 30 percent of borrowers don't qualify because they've missed payments and 20 percent of modified loans eventually default anyway, the Paulson plan only eliminate losses of 60 cents per $100 of subprime loans, versus a total that may be as high as $18 to $20, they wrote.

The extent of home price declines and economic conditions will have a ``far greater impact'' on the rates of loan modifications and foreclosures, wrote UBS's Zimmerman, who is also based in New York.

``I think it's lip service and essentially not meaningful,'' said Michael Burry, president of Cupertino, California-based hedge-fund firm Scion Capital LLC, which manages about $1 billion. ``It will only help those who don't need to be helped.''

Scion's Value Fund gained 85 percent during the first nine months of 2007, helped by bets that subprime-mortgage defaults would rise, according to an Oct. 17 investor letter.

California's agreement with servicers including Litton and Countrywide Financial Corp. was ``only incrementally new news'' because it leaves the details of which borrowers qualify to loan servicers, New York-based Credit Suisse Group analysts led by Rod Dubitsky wrote in a Nov. 30 report.

Regulatory Pressure

If the Treasury plan lays out specific details regarding which borrowers should qualify, ``it should significantly reduce modification cost,'' potentially encouraging more loan reworking, they wrote. Regulatory pressure may also prod a ``minimal'' increase in loan modifications, UBS's Zimmerman said.

``The only way to ensure a major increase in modifications is for the Federal government to impose a massive, wholesale modification, but that would call into question the sanctity of the legal documents of securitization,'' he wrote. ``From all reports no one is seriously considering such an approach.''

For less-senior classes of bonds created in securitizations of subprime mortgages, any potential reduction in losses from government-sponsored modifications probably won't be enough, Deutsche Bank AG analysts including Karen Weaver and Anthony Thompson wrote in a report today.

Collateralized Debt Obligations

``No amount of government intervention less a complete bailout will save'' subprime-mortgage bonds that originally carried low-investment-grade ratings, they wrote.

Such bonds serve as the holdings of a type of collateralized debt obligation that accounts for about half of the $650 billion of the asset-backed-bond CDO market, the largest source of losses for banks. Higher-rated bonds from those CDOs also account for some of the holdings of other categories of CDOs, which repackage assets such as mortgage bonds and buyout loans into new securities with varying risks.

Modifying loans too aggressively may harm mortgage-bond investors more than it helps them, and not just because the action may reduce payments from borrowers who don't need the help, said David Stevens, head of a home-lending venture for Fairfax, Virginia-based realty firm Long & Foster Cos.

``In more cases than not, you're either deferring a problem that will end up being more costly'' because of declining home prices or issues that can't be cured, or cutting borrower payments unnecessarily, said Stevens, who once held executive roles at a servicer purchased last year by Charlotte, North Carolina-based Wachovia Corp.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

Last Updated: December 3, 2007 18:10 EST