Treasury Secretary Paulson’s plan to rescue subprime mortgages will be greeted with legal challenges by investors, lawyers predict.

The plan, announced last week, would stop rate increases on some subprime and adjustable rate mortgages. The holders of mortgage securities are anticipating revenue from those increases and may claim that the rate freezes are a breach of contract.

Because the plan is voluntary, legal experts say that the targets of investor lawsuits aren’t likely to be the federal government, which brokered the agreement. More likely to be named as defendants are mortgage servicers — the companies which collect mortgage payments and decide when to foreclose. Many major banks have a mortgage servicing division.

“The only thing the government did was bring the parties together — the ones on the line would likely be the servicers,” a former general counsel to the Treasury Department, now a fellow at the American Enterprise Institute, Peter Wallison, said.

Mr. Paulson and President Bush would be long out of office by the time any such suits are decided. The prospect of investor lawsuits has prompted at least one bill. A Republican from Delaware, Michael Castle, introduced a piece of legislation last month absolving mortgage holders from any liability that results from modifying rates and coming up with a “workout plan” on certain mortgages.

If passed, such a law could prompt investors to go after the federal government for violating the Constitution’s taking clause. “The federal government would be liable if it passed legislation that effectively overrode the contractual rights of the investors and it cost the investors money,” a partner at the firm Arnold and Porter, H. Peter Haveles, said.

Still, lawyers and economists say it is far from clear that a rate freeze on subprime mortgages would result in a loss for investors. In the end, lower mortgage rates could mean more revenue than rate increases that prompt many foreclosures.

During the Great Depression, a similar governmental attempt to stave off mortgage foreclosures led to a landmark U.S. Supreme Court case. The court ruled 5-4 upholding a Minnesota state law that extended the period of redemption before foreclosure. The case, Home Building & Loan Association v Blaisdell, was brought under the Constitution’s contract clause. The clause prevents states from setting aside contracts. Despite being closely decided at the time, a similar state law today would probably also survive.

“I doubt even Justice Thomas would challenge it,” a law professor at Yale, Bruce Ackerman, wrote via e-mail.

Mr. Paulson’s effort is different from the Depression-era case in that the federal government hasn’t enacted any law to set aside mortgage agreement terms. Mr. Paulson’s plan asks players in the mortgage industry, ostensibly voluntarily, to reset their rates. More generally, the contract clause only applies to state laws that abridge contracts, not actions taken by the federal government, though it could be possible to make a case for a broader application of the contract clause.

The mortgage market has changed dramatically since the Depression, when banks held mortgages. These days, mortgages are pooled together and sold to investors as securities. They are likely to be held by mutual funds and university endowments and pension funds. In the next several months, investors may receive proxies requesting their permission to freeze rates on subprime mortgages.

Under the industry standard, mortgage servicers can modify mortgage contracts that amount to up to 5% of the total value of mortgages they hold, Mr. Haveles, of Arnold & Porter said.

“If the Treasury Department plan does not result in that limit being exceeded then no legal liability arises,” Mr. Haveles said. Above that amount, “the services need a supermajority of investor consent.”

It’s uncertain whether that number of subprime mortgages held by the various funds would be affected by Mr. Paulson’s plan. In all, as many as 1.2 million borrowers could benefit from the rate freeze, which applies only to those who are currently up to date with payments but won’t be able to afford higher interest rates that are scheduled to reset soon. Those already in foreclosure are excluded from the plan.

Should investors sue, the courts may not be very sympathetic.

“Courts act in the real world and read the newspapers, and to me it would seem a tough thing for a court to disregard the human impact of mortgage companies not doing anything,” a lawyer who specializes in securities class actions, Edward Labaton of Labaton Sucharow LLP said.