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It seems as if every day there is another mortgage rescue plan being bandied about the business pages and the cable waves, so why should today be any different?

There are in fact two today: FDIC Chairman Sheila Bair’s plan to guarantee three million mortgages so as to give mortgage investors incentives to modify loans and another proposal in the New York Times editorial pages from Prof. John Geanakoplos. The professor wants to take the power to modify loans away from master servicers and give it to local trustees, thereby relieving the servicers of liability for losses. The theory is that servicers have been slow to modify because they don’t want the loan investors to sue them.

Of course these ideas come on top of the FHA rescue program that just went into effect a few weeks ago and the TARP which has yet to decide how it wants to deal with all the bad loans it’s now allowed to buy.

So where am I going with all this, you ask? Well today I was doing a bit of a think-piece on TV about how that classic fundamental of affordability could actually give us an idea of which local housing markets are ripe for recovery and which still have a ways to fall. Several major cities, like Boston, Denver and Dallas all now have affordability rates that are far better than the 15-year average. These markets are therefore good buys for local residents who live and work in them.

• US Economy and Spending Fall, Signaling a Recession

So then I got to thinking: Let’s say you take all the people who claim to be in trouble on their mortgages. Take those mortgages away, lower the value of the house to the current market price, and calculate the monthly payment based on the current interest rate on the 30-year fixed (and I mean conforming, not jumbo) which is around 6.35 percent. Oh, and by the way the historical average on the 30-year fixed over the last 25 years happens to be 7.89 percent, so I’m offering a deal. How many of those folks could still afford the home? My guess is that some could, but many more could not.

What I’m getting at here is that no matter how far we go in modifying, restructuring, writing down principal on loans in order to stop foreclosures, the bottom line is that most of the borrowers in trouble had no business being in the homes they bought in the first place. You can modify their loans for five years, but they will probably lose the home anyway.

Video: Discussing what went wrong with housing, with CNBC's Diana Olick; John Geanakoplos, Yale economics professor; and John Geanakoplos, Ellington Mgmt. Group partner.

Is that mean? It’s not meant to be. I just think that in order to set the market right we need to let prices fall to where they must and start over again with mortgages, buyers and homes that make sense. We’re all losing money here, but that’s because so many people took advantage of free money during the housing boom (and don’t get me started on how those who didn’t take advantage of that free money still get screwed).

I understand the need to restore the credit markets and stop the crash in housing, but keeping folks in homes that are way beyond their means is just prolonging the pain of the inevitable.

• Sources: US prepares loan modification plan
• US May Back $600 Billion Of Troubled Home Loans

Questions?  Comments? 

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