Homeowner bailout is a lousy idea

The breaking of these obligations will not be free. Foreign investors will demand a higher "risk premium" to invest in U.S. real estate, which will make it more expensive for future mortgage seekers to get loans. And they are bound to sue to get the payments they thought they were owed, which will drive up mortgage banks' expenses.

Moreover, the courts and bureaucrats will be tied up for years in a struggle to define exactly who deserves loan forgiveness. People who are making payments on time will naturally demand to get something out of the deal -- why should they essentially suffer for being responsible? As the cost of the bailout goes up, there's little doubt that state and federal governments will float bonds to pay the refinancing fees and, of course, interest payments on those obligations will be paid by all citizens.

• Talk back: Do you think the government should bail out subprime borrowers?

Economist Martin Feldstein, a former Reagan administration official, told Bloomberg that among other problems, the plan would forever change foreigners' perceptions of U.S. investments. "What are they going to think about investing in American securities in the future if the government can say, 'Well, you thought these were the interest rates and the contract, but we're going to roll that back now, and you'll just have to settle for less'?" Feldstein asked.

Dr. Frankenstein's debt monster

When you start working your way though the ramifications, you may begin to understand why I called the great de-leveraging of America a very big, very long-range problem in this column back in September -- not something that can be ignored or wished away. Debt that was created, distributed, leveraged and re-leveraged by a factor of up to 30-to-1 over the past 10 years by financial Dr. Frankensteins has wormed its way into every corner of our lives and will alter the way we do business in ways we are only beginning to understand.

Indeed, everywhere you look now is evidence that the subprime-debt crisis is morphing and expanding like a creature in a horror movie. Just this week, we learned from hearings in Congress that strapped credit card companies such as Capital One Financial (COF, news, msgs) and Bank of America (BAC, news, msgs) had begun to soak customers by jacking up interest rates on balances for the slightest changes in their credit profiles.

If you so much as apply for a new credit card, according to testimony gathered at the hearing, your current card provider can boost your rates as high as 30% per year. This is not the kind of fee-generation method that card companies would normally like to pursue, but they have been pushed in this direction by losses elsewhere on their balance sheets.

In another morph, individuals scrambling to pay rising mortgage rates on houses that are declining in value are also punking out on their auto loans, student loans and home-equity lines of credit. According to a Lehman Bros. survey, 4.5% of auto loans issued in 2006 to well-qualified borrowers were 30 or more days delinquent through the end of September, up a whopping 3% from the previous month. Lehman said that was the largest single-month delinquency leap in eight years and that auto-loan delinquency rates are now the highest in a decade. Meanwhile, 12% of subprime auto borrowers are delinquent on their 2006 loans, according to Lehman Bros., which is the most since 2002.

Any solution that attempts to solve these issues by cutting rates further to allow people to borrow more will only drag out the effects. It will also force solvent taxpayers to foot the bill for their less responsible siblings and neighbors, a divide that will cause political strife we haven't yet begun to fathom. All of this may ultimately work out in the fullness of time, because Americans are forgiving and generous people. But in the meantime, financial stocks are likely to continue to suffer, so continue to avoid them even as they fitfully rally over the next weeks. They are likely headed much, much lower, as their fundamental value recedes with their profitability.

Fine print

Read more about methadone treatments here. . . . Capital One, focused on credit cards and auto loans, is likely to be an ongoing loser on the subprime front. Learn more about the company here. . . .

Read all about Treasury Secretary Hank Paulson here. Did you know Paulson's passion in life outside work is bird-watching?

Meet Markman at The Money Show

MSN Money's Jon Markman will be among more than 120 investment and finance experts sharing buy-and-sell advice at The World Money Show in Orlando, Fla., Feb. 6-9. Invest four days dedicated to planning and refining your portfolio by attending the event's more than 320 workshops and panel presentations. Admission is free for MSN Money readers.

To sign up, call 1-800-970-4355 and mention priority code No. 009554, or register online.

At the time of publication, Jon Markman did not own or control shares of companies mentioned in this column.

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