A couple days ago, I laid out my thoughts about how the economy needed to be fundamentally restructured to repair the damage done by 30 years of broken Republican economic ideology.
One of the things I talked about was the need to alleviate the bad mortages lying at the heart of the current crisis by (1) re-regulating the mortgage market to provide the safeguards that used to exist; and (2) restructuring the bad mortgages that already exist so that homeowners can continue making reasonably monthly payments.
So I was surprised in the most recent debate when I heard John McCain talk about renegotiating some of these bad mortgages…
… only to discover that he had gone about in the worst way I could possibly imagine.
And when I actually got my hands on a detailed description of what he was proposing, it only got worse. More below the fold.
At the bottom of this diary you’ll find a transcript of the pertinent part of the debate and a complete copy of the e-mail that McCain’s campaign sent out during the debate to back-up the radical plan he was proposing. Here’s the short version:
(1) The federal government buys up the mortgages.
(2) The federal government writes off any loss of value the house may have had.
(3) The federal government gives the homeowner a new mortgage with better terms using the current appraised value of the property.
There’s so much wrong with this, it’s hard to figure out where to start. So let’s start with…
The Scam: Home values are in a slump. But they will recover. What McCain is basically proposing is a massive handout of federal cash to irresponsible borrowers. Let me walk you through it:
(1) I buy a house for $300,000 in California with little or no equity.
(2) Over the past 12 months, the value of that house has fallen 22% to $234,000.
(3) McCain comes in and rewrites my loan at $234,000. I still have little or no equity in the house, but…
(4) At some point, home values improve. Even if the market only recovers just 15% (below the level it was at prior to the bubble bursting), the value of the house will now be $269,100.
(5) I can now sell the house and effectively pocket $35,100 of taxpayer money.
Meanwhile, responsible borrowers who can’t opt into McCain’s program and who bought $300,000 houses at the same time are faced with a loss of $30,900.
The Small Text: McCain didn’t mention this at the debate, but in order to qualify for the “McCain Resurgence Plan”, homeowners would need to “prove” that they “provided a down payment” at the time of the original loan.
What McCain would consider a sufficient down payment isn’t specified, but the basic reality here is that the bad mortgages which are actually causing the current financial crisis — the mortgages that people are defaulting on because of the predatory terms — are disproportionately made up of loans people didn’t provide down payments for.
Now, an argument can certainly be made that those loans should never have been made. But that doesn’t change the reality that these are the loans causing the problems.
Which means that McCain’s “solution” doesn’t actually solve the problem.
So what is he trying to do? He’s trying to bailout the wealthy who have watched the values of their properties go down. He’s not lending a helping hand to homeowners who are in dire need of help… he’s giving away unjustifiable handouts on the taxpayer’s dime.
And this is the $300 billion boondoggle.
The Government Owns Everything: There, is in my opinion, a need to renegotiate the terms on these bad mortgages. There’s a reason that adjustable rate mortgages were illegal before the Garn-St. Germain Depository Institutions Act de-regulated the mortgage industry. (This was the same de-regulation bill that led to the Savings & Loan crisis. It’s a bill that John McCain voted for as a freshman senator.)
But the way to do that is almost certainly not by having the federal government own $300 billion worth of private property in the United States.
In July 2006, the median sales price for a home in the United States was $230,000. This is right around the time that the market started declining. If we use that value, then McCain’s $300,000,000,000 boondoggle will result in the federal government buying up 1.3 million homes across the nation. (The number is almost certainly higher than that.)
So how could you go about re-negotiating these loans without buying up these mortgages and sticking the taxpayer with the bill for your boondoggle?
Well, it boils down to either (a) requiring the banks to re-negotiate these mortgages; (b) giving the banks reasonable incentives for re-negotiating these bad mortgages; or (c) some combination of both.
I’m not an economics expert, so I’m not sure what the best way to handle the balance between the carrot and the stick here. But here are some thoughts on possible incentives: Federal insurance on the resulting loans (to reduce the risk to the bank); using federal funds to cover the closing costs of the re-negotiated loans; making payouts to cover revenue lost to the bank due to the re-negotiated terms of the loan.
This will cost some money, but it won’t cost nearly as much as what McCain is proposing. Nor will it be a freebie handout of taxpayer money to irresponsible borrowers (they’ll still owe what they borrowed — it’ll just be on terms that they can reasonably pay it back). Nor will it result in the federal government owning millions of American homes.
McCain: We’ve got to have a package of reforms and it has got to lead to reform prosperity and peace in the world. And I think that this problem has become so severe, as you know, that we’re going to have to do something about home values.
You know that home values of retirees continues to decline and people are no longer able to afford their mortgage payments. As president of the United States, Alan, I would order the secretary of the treasury to immediately 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 and let people be able to make those — be able to make those payments and stay in their homes.
Is it expensive? Yes. But we all know, my friends, until we stabilize home values in America, we’re never going to start turning around and creating jobs and fixing our economy. And we’ve got to give some trust and confidence back to America.
I know how the do that, my friends. And it’s my proposal, it’s not Sen. Obama’s proposal, it’s not President Bush’s proposal. But I know how to get America working again, restore our economy and take care of working Americans. Thank you.
AMERICAN HOMEOWNERSHIP RESURGENCE PLAN
John McCain will direct his Treasury Secretary to implement an American Homeownership Resurgence Plan (McCain Resurgence Plan) to keep families in their homes, avoid foreclosures, save failing neighborhoods, stabilize the housing market and attack the roots of our financial crisis. America’s families are bearing a heavy burden from falling housing prices, mortgage delinquencies, foreclosures, and a weak economy. It is important that those families who have worked hard enough to finance homeownership not have that dream crushed under the weight of the wrong mortgage. The existing debts are too large compared to the value of housing. For those that cannot make payments, mortgages must be re-structured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they’ve already suffered.The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes. By purchasing the existing, failing mortgages the McCain resurgence plan will eliminate uncertainty over defaults, support the value of mortgage-backed derivatives and alleviate risks that are freezing financial markets.
The McCain resurgence plan would be available to mortgage holders that:
· Live in the home (primary residence only)
· Can prove their creditworthiness at the time of the original loan (no falsifications and provided a down payment).The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner. The direct cost of this plan would be roughly $300 billion because the purchase of mortgages would relieve homeowners of “negative equity” in some homes. Funds provided by Congress in recent financial market stabilization bill can be used for this purpose; indeed by stabilizing mortgages it will likely be possible to avoid some purposes previously assumed needed in that bill.
The plan could be implemented quickly as a result of the authorities provided in the stabilization bill, the recent housing bill, and the U.S. government’s conservatorship of Fannie Mae and Freddie Mac. It may be necessary for Congress to raise the overall borrowing limit.
Crossposted to Daily Kos
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