-”Those who can afford their adjusted interest rate; these homeowners need no assistance.”

-”Those who are already delinquent at the teaser “and may not have the financial wherewithal to sustain home ownership,” some “will become renters again.”

-Those who can refinance (“the first, best option”).

-Those with steady incomes and relatively clean payment histories who could afford the (teaser) rate but (not) the higher adjusted rate.”

Paulson's plan would affect only the fourth group. He doesn't specify how long the freeze would last before the loans eventually reset per their terms; the FDIC chief favors five to six years, while the OTS head prefers three.

Paulson noted that “avoiding preventable foreclosures … is in the interest of all homeowners,” and thus there “is an incentive to avoid foreclosure when a homeowner has the financial wherewithal to own a home.” That may be so, but a “preventable foreclosure” arguably means the borrower can meet the obligations of the original mortgage, just as a homeowner who “has the financial wherewithal to own a home” wouldn't be in a mortgage he couldn't afford in the first place. Beyond these apparent oxymora, Paulson's plan is rife with problems.

First, it's well and good for Citigroup et al to agree to fix the rates on those loans — except they don't own the loans. Investors do, and they stand at the front of the line of parties who would pay for Paulson's plan. The mortgages have been sold, packaged into bonds, sliced into tranches, and are now scattered around the world. So there's a problem identifying where all the cash flows go, much less getting every recipient to agree to the scheme.

And that will be key. Shove it down investors' throats, and the current credit tightness will pale in comparison to the aftermath. We'll see total disARMament, as no investor will ever buy such loans again, fearful that the government will come in after the fact and change the terms. The higher reset rates are the only incentive lenders — and investors — have to extend credit at low teasers to high-risk borrowers. Take away the reward, and no one will take the risk, meaning only the most creditworthy borrowers will have access to credit in the future, at any price.

Also, each of the collateral pools backing those bonds likely contains loans made to borrowers in all four of Paulson's categories. How can the plan direct its benefits only to those in the category he wants to help, without unintentionally bailing out the rest? The bonds would have to be reconstituted, then re-tranched on the basis of borrower category.

Second, who pays for this government largesse? Taxpayers? Paulson has vowed they won't, but they inevitably will in some downstream manner. The big banks? As large holders of some of the distressed bonds, who've already suffered huge losses and are facing more, they have an incentive to spread those losses out in the form of lower returns, and/or defer them into the future (only to see the mess resurface, probably in greater magnitude — see the S&L crisis).

More likely, it'll be creditworthy borrowers, who didn't make foolish financial decisions and over-extend themselves into more house than they could afford. They'll pay the price through lower deposit rates and/or higher loan rates, as the banks pass along the costs of the plan.

A third problem — perhaps the greatest — is the moral hazard issue. By rescuing borrowers who got themselves in trouble, lenders who encouraged it, investment bankers who re-structured the risks beyond the point of recognition, and investors who chased yields that were too good to be true, they will all be encouraged to go out and do it again, assured the government will bail them out when it collapses. A fresh round of speculation will ensue that will create a larger bubble, at a higher ultimate cost.

It's noble — particularly with an election looming — to want to help Americans in distress. The problem is that they placed themselves in distress. A Smart Money article noted, “we have the right to 'life, liberty and the pursuit of happiness,' but not the guarantee we can live in the four-bedroom Colonial that's priced way beyond our means.”

One blog commenter posted, “many over-paid for houses, cuz THAT'S WHAT THEY COST! We … fell for the prediction that if we didn't buy now we'd be priced out forever. We fell for the line that we should buy now, and re-finance later.”

And having admitted that, why should those of us who bought no more house than we could afford, at low rates because we've minded our credit and waited patiently to buy at realistic valuations, be penalized by bailing out those who didn't? That's why this plan has already gone awry.

Brian Hague is president/CEO of CNBS, LLC, a securities brokerage and investment advisory firm. He can be reached at (913) 402-2642 or [email protected]