DMI Blog

Mark Winston Griffith

McCain’s Mortgage Plan: Flawed and Late to the Party, but Welcomed

Coming a week after the $700 billion bailout was signed, the Hail Mary of a $300 billion homeowner rescue pass that John McCain threw during the debate was pretty poorly timed. This kind of plan should have been championed months ago, before the debate on how to avert a financial meltdown for ordinary Americans calcified into what we've got now, which is a race to salvage Wall Street.

But considering McCain's proposal could bring us closer to what DMI and others have recommended for some time now, we'll take it, but with some significant caveats. (Read DMI's ideas on the bailout and homeowner assistance here)

Details are murky; the McCain campaign has provided no official, detailed "plan" to work from. McCain's announcement was more a political move to show voters that he is addressing Main Street's pain, than a well thought-out proposal.

According to the New York Times,

[T]he proposal would ensure that homeowners got direct and speedier help to stay in their residences before they faced foreclosure, so that Wall Street and financial institutions would not be the only direct beneficiaries of government aid. The new loans would be 30-year mortgages at fixed interest rates of just over 5 percent, he said. The McCain campaign did not make clear what level of financial strain an applicant would have to show to qualify for the program.

At the very least, McCain has begun to train the public's eye on where it should be: How to address poorly underwritten subprime loans that are at the root of the financial crisis. Here's what's noteworthy about it:

It's broad and comprehensive: Everything that Congress and the administration have proposed so far, including last summer's $300 billion housing bill, has been limited in scope and has rested on voluntary action from mortgage servicers. Like the Depression-era Home Owner Loan Corporation it's based on, McCain's proposal, depending on how it's structured, could potentially reach millions of homeowners and would not rely on the good graces of financial institutions.

It would be more effective than other so-called housing plans: There is no expectation that the rate of foreclosure will be slowed in any significant way by current foreclosure efforts undertaken by the federal government. Even once the government buys millions of dollars securities under the current bailout plan, any attempt to restructure tranches of mortgages will be severely hampered by the fact that the government will only own pieces of these loans and will not have the power to restructure them. Refinancing these loans one at a time may be the only way to effectively restructure them.

It gets to the root of the problem: Why is there a shortage of credit and confidence in the capital markets? Because so many mortgages have either gone bad or are expected to go bad. We've said it before, we'll say it again. The American economy will never be stabilized until the housing and foreclosure crisis is addressed head-on. Once millions of foreclosures are averted, home prices will hit a floor and the housing market will become more steady. Capital markets will sigh in relief because mortgage backed assets will be shored up.

It potentially removes millions of homeowners from loans they never should have received in the first placed: The greatest tragedy of the current mortgage crisis is the way abusive lending practices became embedded in our lending culture. Refinancing these loans under reasonable rates and terms will help homeowners press the re-set button and rid the mortgage market of this stinky paper once and for all.

It represents an investment in the American working-class people, not the American corporation: It's refreshing to hear a candidate - no matter how late in the game it comes, and no matter how cynically political it may be - talk about investing in the survival of everyday people trying to hold on to their middle class existence.

What is it missing? One big deal breaker, possibly two. So far, the McCain campaign has been resistant to the idea, written into Hope for Homeowners and other similar plans, that the lenders, rather than the government (and taxpayers), pay the difference between the original value of the mortgage, and a lesser, written down amount that the homeowner would presumably pay. In other words, with McCain's plan, the government pays the full, original price of the possibly overpriced loan, rather than forcing the lender to take a loss. Under no circumstances should lenders be allowed to get away with this.

Also, in McCain's plan, taxpayer's will not share in any profits that the homeowner might possibly make. Politically speaking, this is similarly a non-starter.

The plan does have some other significant political liabilities that we must acknowledge and take on directly if it is to ever to see the light of day:

The "moral hazard" of helping out some homeowners and not others: The greatest opposition to what McCain is proposing is that it's going to prompt people to ask, Why should "irresponsible" homeowners or even homeowners at all should be rewarded? It's time for us all to face up to the fact that we are trying to survive one of the worst acts of systematic financial abuse this country has ever seen. Borrowers don't underwrite mortgages, lenders do. It would be a moral outrage NOT to address this betrayal of the American consumer, especially in light of the never ending series of bailouts of Wall Street.

Predatory lenders will benefit: Unfortunately, borrowers and lenders are joined at the hip. But the $700 billion bailout will surely benefit predatory lenders, without any discernable benefit going to the homeowner. There is no doubt that if the federal government buys individual mortgages, predatory lenders will be taken off the hook, even if they are forced to take a loss on a written-down loan, but at least struggling homeowners will be given another chance to pay back their mortgages.

It's unfortunate that the Obama campaign, for political gain, has dismissed McCain proposal. The propoal is no doubt missing some important elements, but it at least focuses the discussion on homeowners, where it belongs. If candidate Obama is the man of the people, the champion of the middle class that he says he is, then he should be willing to work with and then improve upon John McCain's plan, not destroy it.

Mark Winston Griffith: Author Bio | Other Posts
Posted at 12:05 PM, Oct 09, 2008 in Economic Opportunity
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