McCain's Mortgage Bailout Plan

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Taxpayers to Take the Hit

A statement that's up on the McCain-Palin Web site says the plan would cost $300 billion. Holtz-Eakin says an earlier proposal by McCain would have required lenders and investors to take a loss by selling the mortgages for more reasonable current prices. That's the idea behind legislation that was passed this summer that went into effect on Oct. 1, known as the Frank-Dodd measure, after its sponsors in each house, Representative Barney Frank (D-Mass.) and Senator Chris Dodd (D-Conn.). But given the severity of the problem—and the limited response such a proposal is likely to get from mortgage holders, since it's voluntary on the part of those banks or loan servicers—Holtz-Eakin says the government must step up and take the hit in order to put an end to the foreclosure crisis.

"Our original proposal had that feature in it—it required the voluntary participation" on the part of the lender, he says. "But that gets you smaller scale of activity, it slows everything down, and…I think the balance has shifted [to the need] for a broader more aggressive approach."

Austan Goolsbee, one of Obama's top economic advisers, called the proposal "truly stunning." While Obama was one of the early backers of the Dodd-Frank bill and has long backed the principle of having the government do more to facilitate loan workouts for struggling homeowners, Goolsbee was highly critical of the notion that the government should pay full value for the troubled loans. "This proposal, if enacted, would be a massive government subsidy from taxpayers to the most irresponsible banks, including the ones who committed fraud," Goolsbee says. He points out that if a lender engaged in appraisal fraud or other questionable behavior to bump up the original value of the mortgage, that lender would get bought out for a larger amount than one that had not done so. "This proposal would give the taxpayer all the risk, with no gain," adds Goolsbee.

The statement on the McCain Web site fills in some other details: It says the plan would buy mortgages directly from homeowners and mortgage servicers and replace them with "manageable, fixed-rate mortgages." That help would be available to mortgage holders who live in the home as a primary residence, who can prove they didn't fake their qualifications for the loan, and who provided a down payment. The statement also indicates McCain believes the purchases can be made quickly as a result of the authority given the Treasury Secretary in various pieces of legislation.

Clearly, addressing the underlying foreclosure crisis will be critical to resolving the broader financial crisis in the coming months. And simply buying bad mortgage-backed securities and loans from the banks and others who hold them won't be enough if average Joes keep losing their homes. But still more explanation will be needed if McCain's proposal is going to be taken seriously and not simply as fodder for a debate.

Sasseen is Washington bureau chief for BusinessWeek.