McCain's New Housing Proposal (Update 2)

Posted by: Jane Sasseen on October 07

Lots to mull over in Tuesday night’s debate devoted largely to the economy. Both seemed relatively at ease in the town hall format, and neither said anything that looks likely to change the race fundamentally. Which is another way of saying neither committed a big gaffe, and John McCain didn’t appear to do enough to shift the momentum race back his way. According to recent polls, he now trails Obama by around 8 or 9 points, largely because of the economy’s woes. As the financial and economic crisis has grown, voters have increasingly decided they trust Democrats more to deal with the problems, and Obama has benefitted hugely from that shift.

But one thing does stand out: Having heard both these two candidates speak many times, there was only one new idea that was proposed in the entire debate, and it came in answer to the first question. Asked how they would deal with the housing and economic crisis America is facing, McCain said he would order the Secretary of the Treasury to “buy up the bad home loan mortgages in America and renegotiate at the new value of those homes, at the diminished value of those homes.”

The notion of havign the government buy up mortgages directly has been discussed since the early days of the crisis and has generally been backed by Democrats; Senator Obama proposed a similar, though more limited, idea in recent weeks. But for McCain, the idea is new -- and it's a big shift. He clearly meant to use it to position himself as different from both George Bush and Barack Obama on dealing with the average American's woes. (Dare I say Joe Six-Pack's woes??) It's also a huge ideological shift for a man who is running as a fiscal conservative, and who was far slower than his Democratic rival earlier in the year to argue that the Federal government should step up to aid troubled homeowners facing foreclosure.

Given the way the sentence was phrased, it wasn't immediately clear exactly what McCain meant -- or the financial implications of what he is suggesting. Was he suggesting that the government buy up every bad mortgage at its original value and then refinance the homeowner into a lower-priced, affordable mortgage? Or did McCain mean that the Treasury should negotiate first with the lenders or investors holding the mortgages to reduce the values of the original mortgages to realistic current values before buying them out and refinancing the loans?

The first option would mean that the government would take the hit on the difference between the original loan values and current, much lower values, while the second would mean that the banks and investors currently holding the loans or the mortgage-backed securities they've been packaged into would have to agree to take that immediate loss in hopes of avoiding the greater loss that could come from foreclosure. That's the idea behind legislation that was passed this summer that went into effect on Oct. 1st. (That bill is known as the "Frank-Dodd" measure, after its sponsors in each house, Rep. Barney Frank (D-Mass) and Sen. Chris Dodd (D-Conn). It is aimed at helping reduce foreclosures among homeowners whose homes are no longer worth the value of the mortgage -- a condition known as being "underwater".)

Under the Frank-Dodd legislation, lenders or loan servicers must decide voluntarily whether or not to participate in the program, since the government obviously cannot order them to take a haircut on their loan values. Indeed, their hesitancy to do so voluntarily, for fear of lawsuits from holders of some tranches of the mortgage-backed securities pools, is a big reason foreclosures continue to mount.

In a conference call this morning with reporters, and a follow call with BusinessWeek, McCain's top economic advisor, Douglas Holtz-Eakin, made clear that the Arizona Senator is proposing the first option: under his plan, the government would by the mortgages from banks and investors at the original value of the loan, no matter how overinflated that now appears to be. "We’re (proposing) buying back the original mortgage at the original value and then giving (the homowner) the new mortgages" at current values and more affordable interest rates, Holtz-Eakin told BusinessWeek. "Obviously the taxpayer is on the hook for the difference."

That could be a huge sum: enormous numbers of homes are now underwater and are no longer worth anywhere near the value of their current mortgages. Indeed, the Wall Street Journal reported today that 1 in 6 homes is now underwater. Moreover, buying out mortgages at their current values would essentially mean bailing out the lenders who made those loans, or the investors who now hold them, at what have proven to be highly inflated values. (Values which were often inflated with the complicity of the lenders and appraisers who made the loans.) They would essentially be made whole on those loans.

Holtz-Eakin says that an earlier proposal by McCain would have required lenders and investors to take a loss by selling the mortgages for more reasonable current prices, much like the Frank-Dodd bill calls for. But given the severity of the problem--and the limited response that's likely to get from mortgage holders, he 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."

A statement that's up on the McCain-Palin Web site fills in some more of the details. It says the plan would cost $300 billion. It 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 if the one fresh idea to come out of this debate was meant as a serious proposal as opposed to simply fodder for the debate, more explanation will still be needed. As Alex Castellanos, a Republican strategist, put it on CNN after the debate ended, the notion of buying up houses is a "really interesting idea," but it wasn't well explained.

A focus group of undecided voters in Las Vegas, Nevada held by pollster Stanley Greenberg of Greenberg Quinlan Rosner seemed to confirm that sense. Greenberg, a longtime Democratic pollster (he helped elect Bill Clinton and is partners with uber-Democratic strategist James Carville) is hardly an objective source, but the immediate reading he got from the undecided voters he tracked during the debate seems to confirm the sense that the idea may not have made a big dent in public opinion.

While McCain's housing proposal got a brief positive response from the assembled group, Greenberg says it was relatively small. The proposal came amidst a lot of other discussion, "without a lot of context," says Greenberg. "It was a one time thing he threw out; he didn't come back to it." If he had, Greenberg adds, it might have made more of an impression on the surveyed voters. "It was not dramatic, though he got a little rise out of it. But he moved on."

Reader Comments

Sean

October 8, 2008 03:31 AM

Didn't his comment really just show that he has no clue that his "new proposal" is already included in the bailout enacted last Friday?

Reno

October 8, 2008 03:44 AM

Yeah... but if current value is 60% above historical value, and we're heading to that ... historical value, then the govt becomes the biggest sucker in the world.

I bought mine in 1972 for $25,000, own it free and clear. It was worth $2.5M a couple of years ago. So ... I take out a mortgage, then sell it to the govt for $2M - which was the price of the last sale. How about it?

Wonderful idea. When do we get started?

Hartley Lord

October 8, 2008 04:49 AM

To pay the face value of the mortgage to the bank and reduce the homeowner's obligation to reflect the actual market value (which is still falling) is a slippery slope to bail out Paulsons brainless buddies at Goldman Sachs. In addition, the derivative "swaps" own a piece of the collateral. That is an unkown number that will squeal like a stuck pig if denied its share of the "Fat Cat Pork Barrel). You might find that there are more mortgages in the "sliced and diced" category than we have platted residential lots in the entire country.

In essence, "counterfeit mortgages" might be the real problem. That is why nothing should be done until January, when the fox is gone from the hen house.

MandBinc

October 8, 2008 05:05 AM

The thing about these home mortgages that everyone seems to be forgetting or ignoring is that many States and local communities generate the bulk of their revenue from property taxes.

Does the Fed need to pay State property tax on Fedrally owned land? What if the States seize the property for non-payment of taxes?

This is some kettle of fish the current government has cooked up for us.

Yahoo user

October 8, 2008 08:27 AM

It’s a ridicules idea. Why do responsible people have to pay for other’s mistake? This would practically “subside” the housing market but only for those who were reckless, and keep home prices above their true market value.

Michael Williams

October 8, 2008 09:07 AM

Actually this "new" proposal is already one of the available options in the bail out package recently passed. McCain, simply mentioned it as though it was something new and different :-)

Robert Fontaine

October 8, 2008 09:13 AM

So the folks who bought over their heads will be made whole again, and the lenders who gave the money away are made whole again by the 700 billion bailout. Gee, lets see, that would mean that the taxpayers who were honest and bought home they can afford end up bailing out the banks and the homeowners who lied. Is THAT the "personal responsibilty" that McCain has been talking about?

Here's the Better Plan:
The US Gov borrows money cheaper than anyone, about 2% I understand.
For legitimately bad loans, where the homeowers (w/children first) are in danger of losing the home, the Treasury buys the NOTE at current market value of the house, and gives the homeowner a 30 year mortgage at 3%. And the government (taxpayer) gets to share in the equity gain for that house as home prices rebound.

Who Doesn't win?
The lender takes only the hit they would take by foreclosing anyway, it would not be a total loss.
The homeowner gets to stay in their house at an affordable rate and mortgage.
The government, instead of of spending trillions, could actually be working off a 1% profit, plus the equity interest.
The honest homeowners not in trouble dont have to see the government giving their neighbors $100,000 gifts.
The taxpayer doesn't have to bail anyone out.

bamaBama

October 8, 2008 09:15 AM

Another example of where talk is cheap.

user

October 8, 2008 12:25 PM

Robert Fontaine,
Excellent Idea. May I add we start with those in the military first.
I think that if the Man buys foreclosed houses, they should be offered to vets with a similar arrangment. The govt can share in the appreciation too.

Nik

October 8, 2008 12:37 PM

Mr. McCain talked a lot about "Do the Math". Why dont he just sit down with a sheet of paper and pencil and even calculator if he needs to do the math and see how he is talking about stabilizing the housing market by buying up the bad mortgages. Free money to loosers who didnt intented to even keep their homes for six months and providing this bail out package of 700 BD to stabilize the financial crisis. I guess he doesnt have any clue how many zeros comes after the numeric 7.

I hope the decision maker at "Capital" should understand giving rewards (Tax breaks, incentives, etc.) to people who are currently holding their houses, giving benefits to company who is actually surviving this "Financial Crisis" by making a good corporate decison. If they do so people who made a mistake (Homeowners, Coorporate, Banks etc) will regret and never do this again.

Hope they should understand or else the 700 Billion Dollar will go towards "SPA" treatment for CEO's, CFO's etc. etc.

Alex Eman

October 8, 2008 01:01 PM

To Robert Fontaine:

Your comments were fantastic, and well thought out,

regards
Alex

You Don't Get It

October 8, 2008 01:09 PM

In a way, this admits that the loan industry is partly culpable for the inflated prices people paid, and seeks to help the average homeowner.

Ben

October 8, 2008 01:09 PM

McCain's idea will only bring fraud. The government is going to get screwed. Then the government is going to turn around and expect the taxpayer to make up the difference. This is a load of crock. I am so pissed off that I, a financial responsible person, has to 'save' people from being evicted or losing their home. Bull!!!

Mad not Maverick

October 8, 2008 01:17 PM

buy up bad mortgage ? ... 1.5 trillion and he is saying lets pay businesses still more? What about government buying the debt of every business house. Than everybody will have great balance sheet ... Wow that business progressive thinking!

Rob

October 8, 2008 01:20 PM

McCain is clueless as is the rest of Washington when it comes to this topic. In addition to the legitimate criticisms other readers poste, the plans assume that the "bad" mortgages are freestanding and can easily be purchases when in fact they are packaged into tranches with numerous other mortgages, both good and bad, that are owned by a group of investors. Its not as simple as one bank owning one bad mortgage with no other parties having right to that title that can easily be purchased by the pig Treasurer and renegotiated. NO ONE in Washington fully understands but they do not take the time to perform due dilligence, get a grasp on the underlying issues, and develop a plan to address the issues properly and efficiently. Instead gov't will burden the future of the country for decades to grant a former GS banker unlimited authority to blindly throw citizen's money at problems without a solid plan to measure progress against. Not that Obama knows any more than the others but at least his plan is to rebuild our infrastructure and not keep throwing money to the rich thinking it will trickle down to the homeowner. Do you think these bailed out companies will suddenly lose their greed and use their new stability to help out the little guy? Get real!

Jerry

October 8, 2008 01:46 PM

What about mortgage insurance that a lot of these loans required? I think McCain was talking off the top of his head so that he could be "different" then Obama. Heaven forbid they would ever "agree" on anything.

Steve

October 8, 2008 01:49 PM

If this law passes I am going to default on my loan so the government buys the house or forces my lender to renegotiate. If I don't I end up paying off a loan costing much more than my house is worth.
because this will further drop the value of everyone's home. If that happens I will a couple hundred thousand, even though I can afford my house. While the people that couldn't afford their house to begin with come out smelling like a rose.
If they are going to reset mortgages to realistic home values, it should be done for every primary home mortgage in the country. Those that were responsible first, the speculators, or those that used their houses like cash machines to buy expensive cars, etc last if ever.

WaitingTobuy

October 8, 2008 02:04 PM

People who are for this McCain idea are so self serving it is going to make me barf. I bet 100% of them own houses. Why is the interest of people who own houses so important. Talk about special interests and pork! Let the market work itself out ... it is getting very funny to watch. When will people leave that profit is not always guaranteed! I am the founder of a 10 year old company that is successful and growing.

Donna

October 8, 2008 04:06 PM

McCain just lost my vote. I cannot believe that our government is talking about assisting people that can can't make their mortgage payments. Lots of homes in my zip code that sell for half a million or more. I know I can't afford that kind of mortgage payment, even though I would love to own some of those homes. I chose one under $200,000 and paid it off in 12 years. These people knew what their monthly payment would be before they signed. Maybe they could afford their payments if both spouses worked, they didn't drive brand new BMWs, Lexus, Mercedes and give new SUVs or sports cars to their kids when they turn 16. If this program goes through, the builder or previous owner collected their money, the bank will be paid in full, the home owner has a much reduced principal balance and 5 to 10 years from now as property values increase again, this person can sell and make a huge profit.
What's right about that. The government feels they have to fix everything. Better off left alone.

Dezok

October 8, 2008 04:58 PM

I like Robert Fontaine's better idea. I would add that for the ones who are whole and been "good" should get to refinance at 3% too for the same term. So EVERYONE benefits - everyone's mortgage payment would god down.

thomas bridges

October 8, 2008 05:42 PM

I built a house 4 years ago. I was an apprentice in the sheetmetal union. I made sure I built what I could afford on three days a week. I am currently working 4 days a week,maybe less soon. Maybe I should stop making my payment so I can get some free money! NOT GOING TO HAPPEN! I dont under stand why the people paying their bills should bailout everyone else!

frank loweser

October 8, 2008 06:07 PM

This is how I know MccCain is desperate and desperately stupid. This ranks worse than his gas tax holiday idea, which came straight out of focus groups as "sounding good."

People who don't qualify for this bailout, while seeing their neighbors get bailed out, will revolt.

If this moron manages to win, I really am moving to Belarus where the government really works in comparison to what we have in DC.

El Mugroso

October 9, 2008 02:19 AM

This guy McCain is nuts.
Isn't he the same one that stopped his campaign to go and handle the crisis, a few weeks ago?

And he had no clues then, and now all of a sudden "he's got it"?

He stumbled into the chips of the lumberjacks and now wants to take credit by just talking the talk, where he just can't do any walk.

User2

October 9, 2008 09:49 AM

Dear Sean,

Of course John McCain knew the $300 billion was included in the "bailout" bill. This legislation gave the Treasury a lot of discretion on which assets to purchase - i.e. mortgages vs. mortgage-backed securities. John McCain wanted to make sure the funds help Main Street homeowners and not just Wall Street balance sheets.

The point is, many of the mortgages that are dragging our economy down are completely underwater, and unless action is taken, they are likely to remain that way for a long time. By giving value to the underlying assets, derivatives on these assets can also be given the chance to appreciate in value and we will hopefully not see the number of writedowns were the government not intervening to assist the ailing mortgages directly.

peg

October 9, 2008 10:35 AM

STEVE...I agree with you...why should I continue to pay my 6 3/4% loan on my now inflated mortgage...when others who 'cheated' at the system get refinanced at 3% and lower mortgage appraisals? Maybe I'm missing something...but how is this fair to the average home owner...how does this not reward lenders and those who overextended themselves?
I'm all for people keeping their homes...but if anyone should absorb that loss in market value-it should be the LENDERS!

whataboutme

October 9, 2008 12:07 PM

I'm a small business that earns the magic $250,000/yr. But I'm in a niche business which is on its way out. The employment options I am looking at would have me earning much less money (less than half). So, I am afraid that I would not be able to afford the mortgage on my $330,000 house. I have 3 kids- do I get some bailout help if needed, or do I get to loose MY house (and tghe irresponsible keep THEIR $330,000 house), when I bought responsibly for my income and have been a taxpayer and faithful bill payer?

What about you for example, if your job gets outsourced? Then, with your new job, you now cant afford the mortage that was well within your means for years?
Maybe we can move in with the freeloader's houses that we will be paying for with our taxes!

Carol

October 9, 2008 02:07 PM

I'm not sure either of these candidates have the knowledge themselves to determine what will "save the day" for the American people, as concerns the crisis in the financial markets.

Both of them will have to depend on expert advice and, unfortunately, the expert advice so often comes wrapped in a Democrat package or a Republican package.

Unfortunately, even the regulators come from a certain point of view as either Republicans or Democrats. But, at least the Congress seems to be saying there must be a bipartison effort to solve the problem with bipartison experts in both Economics and Accounting.

Isn't is premature for John McCain to think that HE can solve this problem and wasn't this just political positioning to appear decisive?

Thank you for your interest. This blog is no longer active.

 

Election 2008

Washington Bureau Chief Jane Sasseen and other BusinessWeek writers cover the run-up to the Nov. 4 presidential election, paying close attention to how the candidates will handle issues such as housing, the economy, unemployment, and immigration.

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