There are many reasons a mortgage bailout is a bad idea, but an excellent article at homeguide123.com, forwarded by patrick.net outlines the three biggest reasons why it is a bad idea.
Home prices should fall
Home prices have been way too high for way too long and income has not risen at the same level. I wrote about this in May of 2007. It's simple math and a case of supply and demand. In this instance, the demand is being driven down because no one can afford a home, but even worse and the biggest reason prices will continue to fall, demand will be driven down because few can get a loan.
One of the major reasons for the housing market bubble in the first place was the lifting of restrictions for home loans. Lenders got comfortable with the low interest rates, saw other companies making a ton of money on home loans and began to offer and secure more loans to those considered sub prime.
This has cost those companies dearly, so much that the government needs to bailout some, and I highly doubt lenders will make the same mistake again. With a return to traditional lending where a down payment, decent credit and little debt is required, the industry will see a return to a pre-bubble housing market. Less qualified buyers means less demand which means more competition for those buyers which will translate to lower prices.
Some buyers should be renters
Some people claim the 1% hike in the interest rate is going to put them out of their homes, and the rise in rates already have done so to some.
In reality, these buyers purchased homes, banking that the housing market would continue in it's upward trend, with interest only or ARM loans hoping to refinance with the equity earned when their "investment" paid off in a year or two.
It isn't going to happen, so many of these prospectors are crying foul. As the article says, refinancing into a fixed rate or lower interest loan isn't going to help.
There should be consequences
I lost some money on one of my mutual funds, which is also an investment and is susceptible to the same forces as any market. Can I get a bailout too?
For more reading, and a few more reasons not to bailout investors, read about the top 5 most ridiculous mortgage borrower stories of 2007.