U.S. Lends Hand on ARMs

Still the rally is likely to be "short-lived," ending if the Fed cuts interest rates next week, Diamond says.

"Sure a plan is in place, but the reality is a de-levering is in progress and until home prices come down enough rate cuts will not get the already sensitive credit market to open up that easily," he said. "We still see interbank lending at a stand still and credit spreads at wide levels -- this will need to be worked out over time."

Jim Schutz, the director of research at Sterne, Agee & Leach, says investors are skeptical of the plan.

"How this is all going to work out is a moving target and no one is quite sure what the implications of the loan modifications will be," he says. "The biggest impact will probably be not on the banks per se, but the people who hold those securities."

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