WASHINGTON (Reuters) - US President George W. Bush announced a plan yesterday afternoon aimed at slowing a wave of home loan foreclosures that has threatened to knock the US economy into recession and rattled investors worldwide.

Bush said the plan, hammered out by the US Treasury Department in talks with mortgage industry leaders, was not intended to "bail out" lenders, speculators or those who knew they could not afford the homes they bought.

Instead, the Bush administration hopes that it can help many of the two million homeowners who took out adjustable-rate loans with payments due to move sharply higher soon by offering some of them a five-year mortgage-rate freeze.

Bush also urged Congress to pass legislation to reform the tax code to help homeowners refinance their mortgages.

Officials fear 500,000 Americans are at risk of losing their homes as $367 billion worth of adjustable-rate subprime mortgages reset to higher interest rates in 2008 and 2009.

The Mortgage Bankers Association said foreclosures reached a record high in the third quarter, with 1.69 percent of loans outstanding in the foreclosure process. Late payments on mortgages hit the highest level since 1986.

Bush said an estimated 1.2 million homeowners could be eligible for assistance to avoid foreclosure over the next couple of years. However, private-sector analysts said the numbers would likely be much lower.

"In theory, the plan could help as many as 750,000 subprime homeowners," said Mark Zandi, chief economist for Moody's Economy.com. "In practice, my sense is that it will probably help at best about 250,000 homeowners."

The rate freeze is aimed at owner-occupied homes, not those bought by speculators hoping to profit when the housing market was booming.

Under the plan, homeowners who have shown they are a reasonable credit risk, but who could not afford their homes with higher mortgage rates, would qualify for "fast-track" loan modification and the five-year interest rate freeze.

Borrowers who can afford the current loan terms would get help refinancing, but those who cannot and were poor credit risks would probably still lose their homes.

Peter Schiff, president of Euro Pacific Capital, 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.

While avoiding a wave of foreclosures would likely bolster an already wobbly US 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 criticised the plan for not doing enough to help borrowers whose credit scores have improved since taking out loans.