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

[bpress]

This is not a new McCain plan. He was saying this in April. He said, "we must start with the subprime mortgage crisis, with the hundreds of thousands of citizens who played by the rules, yet now fear losing their houses. Under the HOME plan I have proposed, our government will offer these Americans direct and immediate help that can make all the difference: If you can't make your payments, and you're in danger of foreclosure, you will be able to go to any Post Office and pick up a form for a new HOME loan. In place of your flawed mortgage loan, you'll be eligible for a new, 30-year fixed-rate loan backed by the United States government. Citizens will keep their homes, lenders will cut their losses, and everyone will move on -- following the sounder practices that should have been observed in the first place. "
Here is the link: http://www.johnmccain.com/informing/news/Speeches/9bb4e69a-36cc-4ca3-b40d-0cdd41a1b812.htm
He has disappointed a lot of the conservative crowd since he is tacking away from them on this one. He may think that he has their votes sewn up and doesn't need to pander to them - he has Sarah to do that.

[lwfky]

Although I pay my bills every month, including my credit cards, my house has lost part of its value. Can I renegotiate my mortgage and lower my payments?

[ledill]

since i don't own a house can i negotiate my student loans and lower those payments so I can get a piece of what I'm paying for also?

[curly2]

No, see Overdog's answer (re: deadbeat) above.

[Overd0g]

No, only if you are a deadbeat can you get any of the free goodies.

[Lendall]

Interesting commentary, but it raises more questions than it answers. I thought that TARP (or Dodd-Frank -- I assume you are using the terms synonymously) included a provision under which the Treasury would buy assets at current market value (all the "marked-to-market" accounting debate). You seem to confirm this. So is McCain's idea to amend TARP so that the Treasury, if and when it buys home loans (or packages of loan-backed securities, let's say) will be required to purchase them at the original loan value, rather than the current market value? Or is he proposing yet another stage of bailouts for Wall Street? In either case I would be embarrassed to make such a proposal. The problem at the end of the day is that homeowners who have kept up with mortgage payments despite the fact that they are now "upside down" (owe more than the value of their homes) will start demanding equal protection under the law: Why should they get no relief while people with bad credit in the subprime world who are behind in their payments get their principals reduced? Attention attorneys: Class action suits a'comin.

[Carolab]

The idea is that the government buys the property at the present market value but gives the financial institutions the difference between the original loan value and the current market loan value. Complete RIPOFF.

[Jezreel]

Lendall, Politico reported on this story earlier. Essentially, after McCain's announcement at Tuesday's debate, he released 2 documents; 1 on 10/7/08 and a revised document on 10/8. The first document, included this statement at the end of the 1st full paragraph: "“Lenders in these cases must recognize the loss that they’ve already suffered.”
That meant that banks would be forced to sell mortgages at a discounted price.
The revised document omitted the sentence at the end of the 1st paragraph. That means that the government would pay face value for the troubled documents, which was the main reason Sen. Barack Obama gave for opposing the plan.
Under McCain's plan, taxpayers would pay banks a lot more money than the homes are worth and allow them to walk away scot free without taking any responsibility for this crisis.

[Jezreel]

Here's a link to the Politico article which includeds links to both documents: http://www.politico.com/news/stories/1008/14414.html

[BlueZoo]

NBC News tonight reported that $250K homes in FL are now going for $50K-$80K (dependent on location) and are being gobbled up by cash buyers. That says a lot about the housing crisis! Overvalued homes being purchased by unqualified buyers who were given mortgages by unscrupulous lenders. I still cannot feel sorry for any of the unqualified buyers and I certainly don't feel anything for the lenders. So, we have empty homes because of foreclosures? They won't be empty long with these prices being drastically cut and, just maybe, the buyers can afford them!

[Carolab]

It goes beyond the original investment. Many people refinanced after the fact.

[Carolab]

The equity loans were what really compounded the crisis. People went and borrowed against the bogus inflated value of these houses. Appraisers were just doing as they were told and underwriters looked the other way.

[TKI]

This sounds like what a use-car salesman would propose—shiny on the surface, but essentially underhanded—the same thing that got us here in the first place.
It would mean that those banks which, in the first place, are at fault for deceiving and encouraging homeowners into the bad mortgages, now most conveniently get bailed out of their liabilities, whereas the homeowners still remain stuck with their debts, albeit now at more tolerant conditions, while the Government is bugged down with the administrative costs and responsibility for bad assets.

[pleaseIMPEACH]

As a non american, I was/am always puzzled by the 'american dream' that can be acheived
by anyone coming to and living in the usa.

Wrong....t­he problem is the ameican dream can not be had by everyone. Millions
of americans must be told that only a percentage can live in a nice 4 bedroom house
and above. The masses must understand that the most you can afford in the new world
is a small house/apartment or a row house (semi).

The brits know their place in life.....i­f you go to the uk yolu will see what the uk dream is.
The working/middle class live their lives in semi detached houses and the doctors lawyers etc
live in single dwellings.

Your plumber, policeman and skilled factory worker will never rise above a 4 bed semi at most.

I know there are exceptions to the above, but thats how the uk dream works.

Don't tell me I'm wrong...I lived there for 30 years.

Obama.Bide­n 08











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[MatoSka]

Read the testimony first, than let's discuss. hint: Lawrence Lindsay was Assistant to the President on Economic Policy for George W. Bush.

Fixing the Mortgage Market
Lawrence B. Lindsey
February 28, 2008

I am proposing that we create a Federal Board of Certification composed of the
Comptroller of the Currency, a Governor of the Federal Reserve designated by the
Chairman, the Secretary of Housing and Urban Development and the Under Secretary of
Treasury for Domestic Finance to administer standards for mortgages that are packaged
in mortgage backed securities and to certify – for a fee – that the mortgages represented
in that security meet those standards.­.....

More generally, creative approaches are being developed by new entrants to the industry. One
example that is particularly interesting is the shared appreciation mortgage which allows
lenders to lower the principal amount owed by the borrower, and in the process lower the
borrower’s monthly payment, but in return the lender keeps a share in the value of the
house (equal to the proportionate loan reduction amount) which is collected when the
house is sold.

Government should not pick a single approach but should facilitate those good-faith approaches that are out there by making changes in tax and securities rules that might accommodate these
approaches.

http://finance.senate.gov/hearings/testimony/2008test/022808lltest.pdf

[RobinSeattle]

That's all well and good, except if you read the Village Voice article on the mortgage crisis and Freddie and Fannie, HUD was one of the catalysts that ultimately necessitated the bailout of those two public-private entities.

I would also like to see a time limit put on this new layer of government bureaucracy so that it doesn't become a permanent burden on the taxpayer. I was also against the creation of the Department of Homeland Security not just on taxpayer grounds, but for fear that it would become an American oppression palace. I have been proven right on both counts.

We need a top to bottom reorganization of the DC bureaucracy anyway to put it on a 21st century footing and not the WWII one it is currently on.

[jw360]

Here's the problem. The governement is the company that screwed the customer and they're still not ready to admit that they were wrong. They instead want to try pushing that square through a triangle shaped hole and see if the system they set up will still work. It's obvious to me that the customers should get a refund here. Isn't that just common sense? It's the best way to get credit moving again. The governement could immediatly step in and start buying up individual mortgages. As soon as they start doing that, the Mortgage Backed Securities will start increasing in value again because foreclosures will stop. Foreclosures on the market will end up being bought. The Mortgage Backed Securities will start looking like good investments again and be sold. Then the banks can go back to the traditional ways of lending. Problem solved. How hard is that? Just common sense. Why do I think the government doesn't want to fix it from the bottom up.? They think that by letting all these first time home buyers take the hit, they will protect the home values of everyone else. Sorry that's not going to work. The homes have already been built and with no one left to buy them, home values are going to drop. And with the way the economy is going and banks going to make it tougher to quailfy for mortgages, unemployment possibly going to 10%, good luck selling the homes. Unemployment in Nevada is already at 9%.

[kh333]

There is a huge amount of social welfare in here as well. Why should capital loss be covered by the government only for those who overextended themselves? All the houses in the neighborhood devalued. You shouldn't be the only one to lose that money just because you made the choice to make a down payment.
This is how I read McCain's dealio. If I'm wrong, I'll be happy to have my error pointed out and maybe I'll feel less annoyed.
2 houses, each sold for 500000 in 2006. For simplicity, let's say no one made any payments and no interest accrued. Now each is valued at 400000.
Neighbor 1 used some interesting financing, and has a 500K mortgage on the house. Cash out of pocket = 0.
Neighbor 2 used conventional, boring financing and has a 400K mortgage on the house. Cash out of pocket = 100K.
Through the magic of bailout-o-rama, Neighbor 1's mortgage now gets reduced to the value of the house, 400K. Neighbor 2's mortgage stays the same, because it already is the value of the house.
Completely indepedent of interest, Neighbor 2 will now pay (in total) 20% more for their home than Neighbor 1.
This is simply not fair at all. Capital loss coverage for all or capital loss coverage for none. We can't penalize people for making prudent choices, or the lesson learned from all of this will be "go way beyond your means, because otherwise you are just a sucker."

[boophus]

I agree. I tried saying something like this elsewhere but you made it clear. This would benefit those who only got in the fancy house with the granite countertops, stainless steel appliances, walk-in closets, hardwood floors , etc through the use of creative financing. So by they will not only get to keep those houses but I would have to pay part of thier debt. I don't blame the people who bought the houses this way --- I am not judgmental or smug about not being in that situation because honestly if things go the wrong way we could be there right beside them.. But I don't think there should be any passing of thier debt to me through them getting a cut in thier balance owed and thier interest rate. If they were to do this I think it would be in my husbands and my interest to bugger off paying our current mortgage too. I am a compassionate person but I am not a gullible idiot.
I certainly oppose McCains idea of making the Banks whole. For petes sake its like we're supposed to bail the bankers out from the top and from the bottom AND to make the homeowners who are facing foreclosure better off than the homeowners who are struggling to make ends meet at those same homeowners expense.

Obama / Biden 2008

[WritusMaximus]

Obama better take the bull by the horns/get in front of this mess as soon as he is sworn in. Word is that a second bailout will be needed 'cuz the first bailout did not address the problem. That America works program better be part of his things to do in the first 100 days of the Obama administration.

[jw360]

Our country is screwed. Why? Our government has no common sense at all. They're trying to ram a square into a triangle shaped hole. They're plan is not working, and not going to work. It all begins and ends at the bottom. If the bottom is in trouble the top is in trouble. The government's plan was to continue to hand out mortgages to everyone and anyone and thought there would be no consequences, because hey we can package up all those loans in Mortgage Backed Securities and be sold to investors on the secondary market. Well guess what investors no longer want them. Why? Too many foreclosures, increasing foreclosures. They're bad investments. So now the government is stuck with having to buy them because no one else will. Because they're trying to clean up they're own screw up. Who's going to pay? The middle class working tax payer. The first time homeowner. Generation X, Generation Y. McCain is not even proposing the help them out with his new plan. He's looking out for 40 year olds and up. Thanks alot McCain. And now Obama is coming out against McCain's plan, which is on the right track, but still wrong. Now doesn't it make more sense to bailout the customers that got screwed instead of the businesses that screwed them?

[jw360]

Here's the problem. The governement is the company that screwed the customer and they're still not ready to admit that they were wrong. They instead want to try pushing that square through a triangle shaped hole and see if the system they set up will still work. It's obvious to me that the customers should get a refund here. Isn't that just common sense? It's the best way to get credit moving again. The governement could immediatly step in and start buying up individual mortgages. As soon as they start doing that, the Mortgage Backed Securities will start increasing in value again because foreclosures will stop. Foreclosures on the market will end up being bought. The Mortgage Backed Securities will start looking like good investments again and be sold. Then the banks can go back to the traditional ways of lending. Problem solved. How hard is that? Just common sense. Why do I think the government doesn't want to fix it from the bottom up.? They think that by letting all these first time home buyers take the hit, they will protect the home values of everyone else. Sorry that's not going to work. The homes have already been built and with no one left to buy them, home values are going to drop. And with the way the economy is going and banks going to make it tougher to quailfy for mortgages, unemployment possibly going to 10%, good luck selling the homes. Unemployment in Nevada is already at 9%.

[leftLibertarian]

Hey Guys,

Both major political parties bailed out Wall Street.

Vote third party.

[kelleyajones]

Thanks for setting the record straight. Is there protection in the bailout to prevent property owners from enjoying the benefits of a bought-out mortgage on more than one home? John McCain has 13 homes; can he (in theory of course) restructure 13 mortgages? Or a real estate speculator who holds 10 mortgages with zero equity? Does the same manipulation that caused the problem have the potential to cripple the fix and shut-out those for whom it was intended? Because if the friends of the well manicured AIG exec's are given the opportunity, they will surely begin to loot and plunder as soon as the wind dies down.

[playera]

Very interesting.

Will this be explained anywhere else?

debate,
news media,
tv news shows, etc.?

[hotstuff]

Mccain must have not even read all the bill he signed on with sense his brand new idea is part of the bail out Bill! That is really sad, out of it, and plain telling how lazy he is!