Ouch! McCain's Housing Solution Is a Gift from Taxpayers to Banks

When John McCain announced his "new" plan to address the financial crisis by having the government directly buy up troubled mortgages, our first response was "wait a minute...that's already in the bailout bill." And, in fact, the bill does give the Treasury the authority to buy up precisely this type of debt." The TARP authorizes the Secretary of Treasury through Section 3 (9b) to buy "any other financial instrument" that the Secretary of Treasury "determines promotes financial market stability," including "residential or commercial mortgages." The legislation also directs the Treasury to use its new authority to help keep struggling families in their homes. Indeed, word is that Treasury is already exploring how to implement such authority.

As outside economic advisors to the Obama-Biden campaign, we were also aware that his type of effort to restructure mortgages to help keep families in their homes had been something Senator Obama had been calling for since March. Thus our initial conclusion was that this proposal was a rather non-consequential ploy by McCain to provide cover for the fact that he has tended to be either late, on the wrong side, or frenetic and all over the map on policy responses to our current financial crisis.

But today we learned of a detail that makes his plan significantly different -- and much worse. The McCain plan uses taxpayer dollars to buy distressed mortgages at their full, face value from the banks and lending institutions that are currently stuck with them. Only then, after we the taxpayers have fully absorbed the cost to the lender of these troubled loans, does the homeowner get the benefit of the lower principal.

That's right folks...it's private profits and social losses. Instead of an effort to safeguard taxpayers as Senator Obama has called for and the Frank-Dodd bill goes to great lengths to do, this plan takes from taxpayers to provide unjustifiable subsidies to financial institutions - even those who engaged in deceptive or outright fraudulent practices to induce people into homes they could not afford.

What responsible plans like Dodd-Frank do, by contrast, is to include the following critical provisions: First, if lenders want into the plan, they have to agree to "take a haircut," i.e., write down the principal on the loan. This step spreads some of the economic pain around between the lender and the government (taxpayer), who in return for the write down, guarantee that the mortgage will be repaid. Second, Dodd-Frank requires that homeowners who benefit from a lower mortgage and more stable monthly payments share some of the upside benefit with taxpayers when the values of their homes recover. Together, these steps ensure mutual responsibility - that lenders, borrowers and the government each share in the process of stabilizing the housing market while protecting taxpayers to the maximum possible extent. Or then we can go with a "Resurgence Homeownership Plan" and just write checks to financial institutions and hope it trickles back to the rest of us.

Comments

[HRG]

Obama needs to explain this in the next debate.

[watertiger5150]

This is just another fine example of the McCain strategy. He takes and dangles a carrot and hopes the voters will go for it. Well it's not happening. The sheep and lemmings will go for it hook line and stupid, but there still remains those of us who are paying attention. When McCain said that we looked at each other and said hey wait a minute, isn't that already part of the bailout plan? And sure enough we were right!

Mr. McCain every time you say "My friends, I know how to do that." We are saying, well then shut up and do it already! And by the way we're not your friends!

Quit trying to bribe us into voting for you John McCain, because we aren't buying what you're selling.

ENOUGH!

[ssg13565]

All of you people who are railing against the "socialism" of the "bailout", do you understand the choices before us?

Would you rather that the banks get their capital from sovereign wealth funds in Abu Dhabi or China? Does being owned by a foreign government make you happier than being owned by the US government?

You probably wish there were some other choice. The free marketeer fanatics have taken us way past the point of having a palatable choice anymore.

[okjoel]

McCain's proposals are all a shell game designed to sucker the public, whether it's health care or home mortgages or social security. A good rule of thumb when evaluating any Republican initiative.... Where's the fine print or loophole where the public gets screwed and the richer get richer?

[ColdinAlaska]

I was horrified when I heard those words come out of McCain's mouth during the debate. First off, because it was obviously ANOTHER Hail Mary attempt. Second off, there is no way that something like this could be fair and equitable to the masses, not to mention the tremendous amount of money we all would be once again asked to fork over.

It sounds like some sort of socialist plan.
People who made bad decisions (it was their greed that got them where they are, not just the banks) at the most should have their monthly payments reassessed to something closer to what they were before they ballooned. No tweaking of values and payments to banks should ever happen in this 'democracy' we supposedly live in.

Arrgggh. McCain's desperation is coming across as instability. If he is so easily flustered during a campaign, gawd help us if he is elected and handed the Wheel.

[Belleweathered]

I want to know who whispered this absurd plan into McCain's ear; was it Phil Gramm? Was it Charles Keating? Was it one of his 170 lobbyist campaign aides?
What about the massive speculation that caused this housing bubble to exponentially inflate? Speculators jumped in with both feet to perpetuate inflated home values. Is McCain proposing we bail out speculators too?

[PJNoir]

When you don't understand the problem(s)- just throw (taxpayer) money at it and hope it solves itself after friends get a cut.

[jeremyemilio]

Let's get something straight: Taxpayers lost the minute the bailout was signed. Either candidate could have scuttled the deal, but neither McCain nor Obama stepped up. This debate about how $700 Billion should be pumped out of taxpayer pockets and into bank vaults is irrelevant. McCain's plan stinks; it doesn't sit well that banks took unwise risks and could come out those interactions relatively whole. The up side is homeowners will keep their homes. Now, most have no business being in extravagant mini-mansions they can't afford, especially on the dime of responsible taxpayers living in bungalows on fixed rate mortgages, but that ship has sailed. Obama wants to use taxpayer money to buy up mortgages in bundles. Understand, these are the same mortgages, and Obama will overpay too (that's the point… banks could sell the mortgages for what they're worth today; but they'd have to take a loss. The bailout ensures they don't). The only difference is Obama's plan means mortgage holders will still face foreclosure, at which point they'll either be granted a mortgage reduction (a la McCain), or the government will take their homes and sell them at a reduced rate. Either way, the taxpayer takes the hit. Make no mistake, the purpose of the bailout is to take money from the most dependable and blameless taxpayers, and give it to the most reckless banks and irresponsible borrowers. That's what it does, regardless of how you reshuffle the deck.

[californiadreamer]

The bailout bill is one thing. The Housing Bill going into effect this month is another. It's funny how it's been forgotten in all the recent drama. The bill puts forward a formula that allows homeowners who are upside down in their mortgage to re-structure their loan based on current home values. Lenders are asked to write down the loan value to either 85% of value- this gives the homeowner some equity and makes the monthly payment at a fixed rate affordable. Homeowners stay in their homes and the banks get some payments, however reduced, instead of foreclosed housing. . There is a catch- the program is voluntary and lenders have not been volunteering for their "haircuts", It's clear that they were waiting for the bailout to dump their bad loans at inflated value on the taxpayer. They would be happy to have McCain's $300 billion bailout too. What the government needs to do is make loan re-structuring mandatory with the carrot being access to government money for the more toxic , foreclosed properties. The only way to create a stable economy is a stable housing market but the banks hope to be able to have it both ways without paying any cost for their greedy and risk-taking and predatory lending. The politicians have to have the courage to pull away from campaingn financing trough the banking lobbyists have provided them. The American people have to show them how valuable a vote can be.

[MatoSka]

Your putting the banks between a rock and a hard place once you make it mandatory for refinancing without new assets. Mortgage notes lose all their validity, no real return on bank investments in homes through mortgages is possible on loans and housing prices continue to fall. If you want a real housing crunch just squeeze the banks out of the home mortgage business.

[Rog49Thomas]

More liberal class warfare.

Honest John reaches out to provide necessary help to a struggling segment of our society and liberals attack him.

Can you possible imagine how much it costs to tank up one's Learjet with fuel prices where they are?
And do you know that the price of a case of Veuve Clicot has increased over 61% since Pan took office (due to his wise economic policies which have destroyed the US$)?

Of course not!

Who hears the cries of the haves and the have mores groaning under some imagined burden?

Not Oprah, not Sean, sadly not Barrack.

No, it's compassionate conservatives like Honest John and President Pan.

[dragonlady620]

If you are referring to John McCain ,"honest" does not describe him or his running mate. I once admired John McCain for his integrity-but he has morphed into something I don't recognize anymore, presumably to get votes. The McCain I admired deplored this type of politicking and swore he would rather lose an election than stoop to using these kinds of dirty tricks and lies.

[Rog49Thomas]

More often than not a political persona reflects nothing more than the desire to win an election.

"Honest" John has not changed. He has not fallen from grace.

There is a term for someone who says one thing and does another.

At it's not maverick.

[yellowdogdemocratic]

In the long run, why don't we do away with variable rate mortgages altogether? Does it make sense for the people with the highest credit risks to be given a mortgage rate that will change with the current market interest rate every year, four years after they close on their house? Would we be in this mess if people at high credit risk were never given variable rate mortgages in the first place? This is a predatory lending practice, and it is systemic. It is practiced by all mortgage lending institutions, and it should be stopped. I can't think of one reason why this practice was ever put into place to begin with. PMI insurance is supposed to cover high credit risk mortgages.

[BatMasterson]

I was wondering about PMI myself. What the hell is the point of it if it doesn't shield the bank from risk? And why haven't I heard anyone say anything about it?

[yellowdogdemocratic]

I think the PMI money was spent on a spa vacation.

[Overd0g]

This plan sucks. What about people who didn't buy twice the house they could afford? I guess they get screwed. What about renters who've been waiting and saving? I guess they get screwed. I guess everybody that was responsible gets screwed to pay for deadbeats. Sounds like a typical government "solution".

[curly2]

That sounds about right.

[jeremyemilio]

Yep, and it's even worse than you've laid out. Think of those renters, for example. Not only do they have to help pay off, for people they don't even know, mortgages they personally would never consider taking out, but the whole purpose of the plan is to ensure that home prices remain too high for them to become homeowners themselves. That's right... your government (and this includes both sides of the isle and both candidates) is desperately scrambling to put together a plan to make sure that homes remain unaffordable… and they are doing it on your dime. Anyone who does not currently own a home but aspires to own one in the future should be marching in the streets. Why they are not is beyond me.

[MatoSka]

Actually, home builders need to develop new forms of mutiple occupant residences. Oh, wait, those are called apartment complexes aren't they? From what I have seen they face 1% delinquency rates. Things are changing today and neither bailouts nor demonstraions are going to keep that from happening. From the looks of things, neither will the Presidential election.

[yellowdogdemocratic]

Is this the fault of the people who took out variable rate mortgages, the lenders who gave out these mortgage loans and the real estate brokers who negotiated them, or all three? I think it is possible that some first time home buyers didn't know what they were getting into when they took the variable rate mortgage loan. The interest rate on variable rate mortgages are typically lower than the average market rate, and 5 and 6 years ago that rate was extremely low. I also think it is possible that those first time home buyers didn't realize how much their monthly payment would increase when their mortgage rate went variable after 4 years. The market interest rate jumped what, 2 full points between now and 5/6 years ago. That is a huge jump. Is it possible that the mortgage companies and real estate brokers didn't realize that these mortgage payments would increase by 50% when the interest rates on these homes went variable? No, not possible at all. They knew exaclty what would happen and turned a blind eye to it so that they could make a lot of money 5/6 years ago. I'm not saying that home owners don't share some of the blame for this, but I think the blame is primarily on the mortgage lenders and real estate brokers.

[BatMasterson]

not to mention how inflated the home prices became. Where I live it just seemed like the cities were just artificially pumping up the assessments so they could get more tax money.

[vincent1]

When we decided to tap into the equity in our home to do some needed upgrades, our local bank only offered ARMs. They refused to even talk to anyone about fixed-rate mortgages. So, we did their ARM for about a year to get started on our projects and then shopped for a fixed-rate. It seems some banks are more than a bit greedy, doesn't it? They were trying to take a little less at first in hopes of taking a huge share in 5 years. I feel sorry for first-time/young homeowners who don't understand the predatory practices of many lending institutions and realators who tell them they can get them a good mortgage so they can afford more house than they anticipated. They get stuck every time.

[FallingUp]

Its not like McCain would follow through on it anyway, he just needed to make something up that sounded good at the time to voters watching the debate. That's pretty much been his strategy all along because his only real ideas are to call himself a Mavrick and rail against earmarks. Beyond that, he's got nothing. So he just makes stuff up. Who knows what he would really do once elected.

[altara]

Questions

McCain's plan is for the government to help distressed homeowners burdened by mortgages they cannot pay.
Is it true that the government would be paying off these mortgages at face value?

Doesn't the rescue plan do the same thing, giving the government these mortgages, which
have been securitized?

So isn't the rescue route much superior, since purchases are at a heavily discounted price?

Millions of Americans live in apartments, condos, and small homes. Most of these have living room - dining areas and small kitchens.

How in the world do these families figure out their budgets and pay their bills when they do not have a kitchen table?

homer www.altara.blogspot.com

[jessieo]

Will allowing judges to rewrite the terms work?

[jessieo]

Why won't allowing bankruptcy judges rewrite the terms of the loans work?

[meede]

Why are people surprised? McCain up to his usual tricks. They listened to Hillary's campaign when throughout the primaries had done the Ayers & Wright crap. McCain has heard the answers but makes the choice to ignore things. McCain is now using the same garbage we have heard for at least the past year.

With this mortgage idea, Hillary and Barack have both talked about this but after further consideration, concluded it was not realistic. McCain snaffus the idea as his own according to him at the debate.

Same as the campaign slogan of "Change" as used by Barack long before McCain.

The man & his campaign do not have an original thought in their brain. They sit at the trough and pick out the ideas the other campaigns have come up with but have tossed knowing they won't work and are not good for the people and the Country.