Peter Schiff, president of Euro Pacific Capital Inc, called the deal a "huge government giveaway" that would in essence reward people for doing the wrong thing.
"They are basically saying we are going to help you if you can't make the higher payments," he said. "That means everybody who can make the higher payments is going to try to do what they can to demonstrate that they can't make those payments."
Rising foreclosures concentrated among subprime borrowers triggered financial market turmoil because the mortgages were packaged and resold to investors around the world.
Many investors did not fully understand what they were buying, and relied instead on credit ratings agencies that initially gave the securities high marks. When defaults rose, the market for those securities dried up, making it hard for holders to sell or value them.
Banks have since recorded tens of billions of dollars in losses tied to those securities.
CONCERNS REMAIN
While avoiding a wave of foreclosures would likely bolster an already wobbly U.S. economy, some on Wall Street worried that they would be forced to accept mortgages rewritten in the borrowers' favour.
"To say to investors that the terms of the contract you signed are going to be overwritten is a clear disincentive to investors to provide capital going forward," said Larry Smith, chief investment officer at Third Wave Global Investors in Greenwich, Connecticut. "That's just not what government is supposed to do."
Standard & Poor's said freezing rates on subprime mortgages may lead to further deterioration in credit ratings on bonds backed by the loans.
Under the plan, some subprime borrowers who took out loans from January 1, 2005, through the end of July 2007 would be offered a five-year "rate freeze" if they are facing a reset over the coming two-and-a-half years.
Democrats welcomed the Bush administration's effort, but said more needs to be done.
"We know the efforts are not one that will cover everything, but it's a step in the right direction," Senate Majority Leader Harry Reid said.
House of Representatives Financial Services Committee Chairman Barney Frank applauded the effort, but criticized the plan for not doing enough to help borrowers whose credit scores have improved since taking out loans.
