WASHINGTON (MarketWatch) -- Bailing out Bear Stearns Cos. won't address the falling home prices and tide of foreclosures that will continue to plague the economy, some observers said Monday.

Consumers remain in an environment where nothing substantial has been done to prevent foreclosures, said Jim Carr, chief operating officer of the National Community Reinvestment Coalition. The Bear Stearns deal highlights the need for faster action on legislation to enable the widespread modification of bad loans, consumer advocates say, and the importance of improving related asset quality.

"It's almost stunning to witness the shoring up of a major financial institution, but not addressing the problem that the quality of housing assets is deteriorating with each minute we wait," Carr said.

The Federal Reserve is backing J.P. Morgan Chase & Co.'s JPM, -0.84% bargain-basement buy of Bear, which was the second-largest underwriter of mortgage-backed securities -- a move that some say is "bailing out" Bear. See full story.

Kurt Eggert, a law professor at Chapman University's School of Law in Orange, Calif., and a former member of the Fed's consumer advisory council, said the Bear deal shows the "growing disconnect between the Bush administration's willingness to help Wall Street and its willingness to aid the homeowners facing foreclosure."

A plan to reduce foreclosures should be the top priority, he said, as defaults and foreclosures have been at the root of the subprime crisis.

"Of all the investment houses, Bear Stearns was the one most deserving of going under because of the subprime crisis, both for its ownership of a subprime lender and its work packaging those loans," Eggert said. "However, the Feds are doing more to help Bear Stearns than the borrowers facing foreclosure because of Bear Stearns actions."

Addressing one financial institution at a time is not a solution to the economy's woes, and there needs to be more focus on addressing the quality of assets that institutions are holding, NCRC's Carr said.

"There has to be a plan that addresses the loans that are increasingly upside down," Carr said. "Every day that we wait more and more people's home loans become upside down because housing prices continue to fall."

Home prices fell 8.9% in 2007, the largest decline in the Case-Shiller home price index in at least 20 years, according to a recent reading of the index. Foreclosure filings were up 60% in February from the prior year, but down 4% from January, according to online marketplace RealtyTrac, which forecast increasing foreclosure activity.

Danilo Pelletiere, research director at the National Low Income Housing Coalition, said there has not been enough attention and action on helping low-income homeowners in trouble.

"The folks that are very likely to need to be bailed out are those that were brought into homeownership and invested all their wealth," Pelletiere said. "There's a strong push not to have the bailout focus on those people."

Far-reaching proposals needed

Some homeowner assistance programs are already in action, such as FHASecure, which is limited by eligibility requirements, and Hope Now, a voluntary alliance. But those programs have had a limited impact, and far-reaching legislation is needed to prevent the "foreclosure epidemic" underway, said Allen Fishbein, director of credit and housing policy with the Consumer Federation of America.

He supports foreclosure prevention legislation that is under consideration in Congress, including a proposal that would enable bankruptcy judges to revise mortgage contracts, helping homeowners make their payments.

"Bankruptcy reform is direct and does not involve any bailout at all," Fishbein said. "There are some lawmakers who think that normal market forces are going to correct this problem. Hundreds of thousands of people have lost their homes while Congress has fiddled deciding whether to enact a government solution."

Some say those who have made their mortgage payments shouldn't end up subsidizing those who haven't.

"Under the circumstances, the most appropriate federal response would be to propose policies aimed at restoring personal responsibility and financial independence," according to a Heritage Foundation statement.

In his Saturday radio address, President Bush said the government can help "responsible homeowners weather this rough patch," but that some actions could have unintended consequences and hurt some homeowners.

"For example, one proposal would give bankruptcy courts the authority to reduce mortgage debts by judicial decree," Bush said. "This would make it harder to afford a home in the future, because banks would charge higher interest rates to cover this risk."

The president also opposes proposals that would "artificially prop up home prices," reasoning that delaying a correction would prolong problems.

"We are focused on helping a targeted group of homeowners -- those who have made responsible buying decisions and could avoid foreclosure with a little help," Bush said.

Borrowers at risk

Looking to "stem the significant rise in mortgage foreclosures," Rep. Barney Frank, D-Mass., has offered a plan to enable the Federal Housing Administration to insure and guarantee refinanced mortgages that have been significantly written down by mortgage holders and lenders. That plan would help refinance 1 million to 2 million loans for at-risk borrowers, according to Frank. Read more.

A plan from NCRC calls for a three-year program called "HELP Now" that would see the Treasury Department buying loans, including those held in securitized pools, at a steep discount. Loan pools purchased by the federal government would be sold back to the private market after being discounted and modified with lower principals and interest rates.

Dean Baker, co-director of the Center for Economic and Policy Research, said a number of proposals that are geared toward helping homeowners facing foreclosure will actually benefit banks and other holders of bad mortgage debt -- institutions that could "earn tens of billions of dollars at taxpayer expense." He added that owning can be much more expensive than renting.

"It's really infuriating for me that we pushed low- and moderate-income people to buy overpriced houses with really bad mortgages," he said. "And even now, after it's proven so disastrous, you have politicians that still can't take two minutes and think for a second that maybe it's not a good idea for everyone to be homeowner regardless of what price they're buying at."