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.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
CORRECTION:
Sounds more like a speculative home equity loan by the government than a foreclosure.
SHOULD BE:
Sounds more like a speculative home equity loan by the government than a refinance.
I feel sorry for the people who are going to lose their houses because someone told them that their house would keep going up in value, so they could re-finance every year forever.
But, I don't think those of us who were careful about buying a home we could afford, who paid points to buy down to interest rates that were competitive and lock them in for 30 years.
In my opinion, the banks and mortgage companies conspired with certain greedy or niave people to bid up the price of real estate and spend every penny they could extract from it on other things.
I would rather see our government allow the foreclosures and let the price of homes adjust back down to affordable. Let the banks lose money on them. Then, the "victims" can buy a less expensive home on reasonable terms and they will have learned a great deal about managing their money.
common sense has no place in government!!!!
good point though ;)
"if lenders want into the plan, they have to agree to "take a haircut," i.e., write down the principal on the loan."
If that's the case where is the motivation for the bank NOT to foreclose, the sooner the better?
"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."
Several questions on this:
Does this just for primary residences or does it include all homes?
How will the payback of the homeowner to the government affect the equity that has already been invested in it? Sounds more like a speculative home equity loan by the government than a foreclosure.
What is the motivation for the homeowner to hold on to the house if he or/she loses the equity in the process?
It's better and cheaper for banks to keep homeowners in their homes and not foreclose. Most important, it protects the value of homes in the neighborhoods.
If the bank is required to write down the principal in order to refinance the mortgage, they are already guaranteed a loss if they agree to participate in this pogram as described. The banks already hold the title to the property as it is. The home and the property are the assets of a mortgage note, not the neighborhood.
This kind of voluntary plan would find very few takers. It wouldn't protect the investments of established equity for the homeowners. It wouldn't protect the investment of the banks for financing the property in the first place. And it wouldn't guarantee any protection to the government (taxpayers) for the buyout price.
Right now, for homeowners who are upside down on their loan, they have no motivation to stay in it. It makes more sense to walk away. To write down the principal allows them to refinance at a lower amount and thereby reduce their burden, thus potentially allowing them to pay their mortgage. Most homeowners do not want to lose their homes. They live in them. If they are upside down on the loan, they have no equity as the value of the home at current market prices isn't close to the amount that they originally paid for it. The equity is already gone. Banks do not want to foreclose as they lose an even greater amount and they are not in the business of buying and selling real estate. The longer they "sit" with a property, the more money they lose. In today's economy, houses will not sell for the original loan amount any time soon so the banks lose to.
I believe this only applies to primary residences.
Folks with 5 year balloon mortgages have no equity because that is embedded in the mortgage note. Those, whose property values have declined, can refinance the deficiency with the bank after the sale of the property on new terms and with new assets to secure it.
There is a contagion spreading through the entire financial system that will kill our world economy if it's not dealt with.
Obama and Biden have already stated that they agree with renegotiation of both the interest rates, AND the principle on risky mortgages. The only difference is that they would outsource it to bankruptcy courts, which would drag out that process for years.
We already dropped up to $850 billion into this, specifically to say that we were NOT going to abandon the banks to their demise. So what's the big deal? I don't understand the partisan attack over this plan.
Sure it would benefit the banks. I thought that was the idea! $850 billion worth.
Think of it this way... A year ago Fannie Mae and Freddie Mac were gobbling up new subprime and Alt-A mortgages at full price, and Dems were all for it. Now that the real estate market has tanked, Fannie and Freddie have tanked, and the taxpayers now own all those losses.
Since the subprime meltdown is the root cause of ALL this, why not go the last mile and buy the rest?
Why were Dems willing to abet the the GSEs buying up all this bad debt at full price last year, and are balking now? Did they get caught with their hand in the cookie jar?
I agree with your post but what is left unsaid is that this quote:
"That's right folks...it
could just as easily be talking about the Bailout Law, which Obama helped pass.
Just typing something on the internet doesn't make it true. A year ago Fannie and Freddie were desperately avoiding new subprime and Alt-A loans, which is why we are where we are today and not after the election. More simply, Fannie and Freddie realized (years too late I'll agree) they were overexposed to risk and stopped buying, much to Bush's chagrin. If they could have held out for another 2 or 3 months, why the election would be over, McCain and Palin safely ensconsed, and 4 years to deal with the problem.
Further, until the web of CDOs and MBSs and the alphabet soup of all the other phony paper is untangled, there is no way to buy individual mortgages without the mortgage holder going through bankruptcy, or completely refinancing each loan one at a time. There is no magic bullet here.
For once I would like to see any republican stand up and say, THIS IS OUR FAULT. WE WERE IN CHARGE, WE PASSED OR DIDN'T PASS THE REGULATION AND ENFORCED OR DIDN'T ENFORCE THE LAWS THAT LED TO THIS, AND WE TAKE THE BLAME FOR IT. NOT ONLY THAT, WE HAVE NO IDEA HOW TO FIX IT. PLEASE HELP US. Sadly that will probably never happen.
Look, lets first put the blame in the right place. It's everyones fault:
Democrats and Republicans in Congress / White House had no clue about the complexities of any of this. Lack of oversight, unnecessary regulations, budget deficit, false notion everyone should own a home (show me that in the constitution).
Wall Street: They wanted to make money. Low interest rates, ignorant equity holders, disconnection between risk, reward, performance, etc..... Really smart guys w/ no common sense.
Rating Agencies: For putting a stamp of approval on this junk and knowing potentially things could go wrong. Once again smart guys w/ no common sense (i.e. ignorance of correlations of defaults in rmbs securities).
China: Not spending, providing all the cheap liquidity in the world.
Alan Greenspan. Keeping rates too low for too long. Low rates help drive all the value destroying financial instruments to try and create extra yield.
Mortgage Brokers. Downright criminal and deceitful.
AND THE NUMBER ONE PROBLEM--THE AMERICAN CONSUMER. Regardless of who they listened too, if you can't afford it you can't afford it. WE SHOULD HAVE NO PITTY FOR THOSE WHO TRIED LIVING BEYOND THEIR MEANS.
I don't favor bailing out banks. We need to allow orderly bankruptcies of financial firms and allow remaining firms to recapitalize. WE ALSO SHOULDN'T WRITE DOWN PRINCIPAL. WE CAN WORK ON DIFFERENT LOAN TERMS i.e. 50,60 year mortgages, gov't upside options, etc.....MO
What a great point about the "haircut" versus the handout. Perhaps you can mention this sometime on Kudlow without being shouted down by the Supply Siders.
I'm confused and disappointed Barack. Now I many not vote at all. Maybe Ralph Nader has the right idea? Would you rather give banks money at the top by buying MBSs from Wall St? Or would you rather keep people in their homes and give money to institutions buy bailing out the victims at the bottom? I thought you for building the economy from the bottom up? And by the way the with less foreclosures there are the, Mortgage Backed Securities the Govt is going to buy increase in value. Obama is wrong, this would be more beneficial to taxpayers than just buying MBSs. It puts out the fire. It prevents people from losing their life savings or future savings, and is what needs to be done in order from all Americans to become slaves of our governement and big corporations. Yeah will be competing soon everyone with the world economy. Just wait until everyone is forced to start working in sweat shops.
Read the post and read the plan supported by Barack before you jump to conclusions.
You still need to vote for Obama or otherwise McCain will win.
McCain's administration will only be for the wealthy. And only for McCain's self interest.
Well a vote for McCain is a vote for a Supreme Court that will strip us of Habeas Corpus (McCain has said he will choose them based on this). What does that mean? It means if you don't like what is going on and speak out you may be imprisoned without cause and held as long as they like, even executed. This means political prisoners. Perhaps Ralph Nader would be first to enjoy McCains hospitality. The Supreme Court is hearing within the next 2 weeks a case involving police not being held accountable if they use excessive force and kill someone who is innocent. Then there is the police force in one of the southeastern states that put everyone who protested against them on a terrorist list for Homeland Security. Without habeas corpus they may have been rounded up and jailed. Ask yourself why they have brought back a brigade to specifically quell uprisings of citizens. '
Conclusion to really wordy post ( hey I am always wordy lol)
As for me I will vote for Obama and Biden because they are both Constitutional law experts. I trust them to ensure we keep our rights to disagree and take nonviolent action to try to get our idea made real. McCain means the true end of Democracy with a hollowed out constitution and disenfranchisement on epic levels by those who have power already - the republicans , the corporations, the richest and the bankers. Give me a pragmatist like Obama and we can get there. I wish we had more like him - maybe we could fix things faster. McCain makes a big deal out of Obamas inexperience. To me the short length of his time in Washington is a BIG PLUS when combined with his willingness to learn and listen and accept input from others. It is his intelligent judgment I appreciate in the face of this crisis. It was the pragmatist Obama who saw that it was political suicide to stand against the Bail -out. IF he wins it will be 2+ months to his taking office and then I believe things will CHANGE. Email him, email your representaives and senators your arguments. Write cogent Non attacking essays.
Agreed. FactCheck draws a strong correlation between all three aspects of this idea. Are you in such a rush to condemn McCain on every statement that whether an idea is good or bad is dependent only on who utters it?
For the record, this is a poor idea regardless of who utters it or how they care to nuance it. The overall concept is wrong thinking.
How about a negotiation with the banks: We'll loan you some money to free up credit if you give better rates to those that are in foreclosure. It's that easy. Banks need money and when people aren't paying anything, it doesn't help. We don't need to buy up bad debt... the banks can take a loan, pay us back and give better rates to homeowners. It's that easy. This is not rocket science!
sure, punish those of us who made conservative purchases with no-nonsense loans and make our payments on time. in your scenario, there's no interest rate relief for us.
AMEN! We saved, we had to show 5 yrs. of IRS statements & bank statements, our bills, utilities, savings, 401K amounts and more, and we got a regular loan we could afford. Why should I bail out those who didn't do what they should have? No tears here!
Yeah that's a great idea. Problem is banks rarely agree to write down principles. They would rather you sell it to someone else with a "Short Sale", have you take a hit on your credit and then write off the loss. Makes no sense right. Why not just write it down and forget about selling it to someone else? An acquaintance of mine told me why and very few people know this. One banks rarely take the offer for the short sale. Then what happens? You guessed it foreclosure. Why don't they take it? Because the Federal Reserve lends banks money against the full value of the mortgage. The banks then lend the money out borrowed from the Fed and lends it out again at interest making double profits, triple profits and so on. They lose no principle because they've sold it to the Federal Reserve? So if a bank ever wants you to do a short sale, tell them "Thanks but no Thanks". Just let it go into foreclosure, make them evict you and in the mean time sell everything in the home you can get your hands on. It's all about just how much money these corporations can suck out of the American worker and the governement is helping them do it.
How about Obama's plan to allow bankruptcy judges to "write down" the principal amount owed on a home by a deadbeat borrower? The lender (you and me 401K holders) get to eat it on those. So what's the real difference?
I hadn't heard about that. Source?
Nothing. They are both great big liberal solutions. Except only one of these guys is supposed to be the "most liberal".
I can't tell which one it is now.
Neither can anyone else! We're back to voting for the lesser of two evils!
That would drastically reduce all new lending even further. Banks would refuse to enter into a loan contract with anyone but the best qualified, with the most downpayment and would have much higher interest rates. When you tell the banks that contracts can be broken by a judge, their risk goes much higher. It would destroy the home lending market system
You must be logged in to comment. Log in or connect with
