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The Subprime Soap Opera Continues

The melodrama continues, complete with sympathetic victims, scheming heels, and would-be saviors, some of whom may or may not be scheming, opportunistic heels. Who's who depends on you. Are you one of the majority of Americans who didn't take on too much debt to buy a home you couldn't afford? Or are you a burned home-buyer or seeker of public office looking to score points with an ill-conceived show of poorly aimed sympathy?

Big-small government to the rescue
I have already catalogued some of the ways that our "conservative" White House intends to soak taxpayers and consumers via a bailout plan for those who gambled on housing and lost. (Yes, I'm saying that even those who live in homes they can't afford are gamblers.)

The plan getting the most ink from the easily distracted press corps is the five-year subprime mortgage freeze. President Bush will be detailing this so-called "private sector" bailout in a ceremony today. It was reportedly arranged with the cooperation of big banks and lenders like Citigroup (NYSE: C  ) , Wells Fargo (NYSE: WFC  ) , Washington Mutual (NYSE: WM  ) , and Countrywide Financial (NYSE: CFC  ) .

A convenient bout of generosity
As I've suggested before, I believe these banks are playing ball only because, they figure, if they don't, Congress will come up with an even more industry-unfriendly plan and shove it down their throats.

Well, the posturing from Democrats like Hillary Clinton, D-N.Y., John Edwards, D-N.C., and Chuck Schumer, D-N.Y., already suggests that an even bigger bailout plan may be in the works. This one doesn't go far enough, the vote-hungry presidential candidates claim. Schumer is worried that investors left holding the empty bag will attempt "legal roadblocks" to hold up the bailout. (Don't you just hate when those greedy fat cats defend their contracts with obstructionist maneuvers to thwart the greater good?)

Who pays for that free lunch?
The most obvious way to grease the wheels and prevent that unpleasantness would be, no surprise, to buy off any prospective roadblockers with taxpayer money, either direct handouts or tax incentives.

Of course, soaking the rest of us for our neighbors' fiscal irresponsibility is already part of the Bush game plan: Ex-Goldman Sachs (NYSE: GS  ) CEO, Treasury Secretary Paulson, and the president are going to urge Congress to pass legislation allowing municipalities to do the tax-and-bailout for them. But I wouldn't hold out hope that this is the last of pocket-pickings for the silent, responsible majority.

An unfree lunch that won't feed the beast
Too bad this plan is doomed to fail. Rate resets, as discussed in a recent Wall Street Journal piece, aren't the problem. Irresponsible borrowing is. Too many people borrowed way more than they could afford to pay, counting on appreciation in property values to bail them out of trouble.

This New York Times story says that nearly a quarter of subprime borrowers are already delinquent on their payments -- before the biggest reset waves roll in. Furthermore, there are a lot more resets coming down the pipe, and it goes far beyond subprime, into "Alt-A" or "liars' loans," all the way up into prime. Only look at this chart, or this one, if you have a strong stomach.

Foolish final thought
How long before these folks can no longer afford their payments, or would rather pay off the credit cards than the mortgage, and step up to demand their get-out-of-jail-free card?

How much do you want to pay to help them out of the contracts they signed?

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