Republican presidential candidate John McCain appeared to offer a helping hand to home-owners struggling to make mortgage payments during Tuesday’s debate. His American Home-ownership Resurgence Plan promises $300 billion to have the federal government buy bad mortgages and rewrite the terms so homeowners can avoid foreclosures.
This idea certainly isn’t new. The Treasury secretary has the power to buy mortgages and modify terms under the $700 billion financial rescue plan passed by Congress last week. Requiring such direct help to homeowners, rather than just allowing it, may make sense. But, if this is so important, why didn’t Sen. McCain push for such language in the bill that he claims he shepherded through Congress?
That is just one of the many questions left unanswered by Sen. McCain’s brief description during the presidential debate and the written explanation from his campaign.
According to the written materials, the 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.” It does not say which type of mortgages would be purchased. Just those made by predatory lenders where the borrowers clearly didn’t qualify for the loans? Would families that refinanced their homes to use the increased equity for trips and cars qualify? Who would sort all this out?
For a candidate who hammers on the need for reduced government spending and a reduction in government programs, this sounds like a large new bureaucracy.
In many cases, government intervention may not be necessary. For borrowers dealing directly with a bank, there is a possibility of working out a deal that eases monthly payments and saves the bank from the unwanted foreclosure process. For homeowners with mortgages from brokers who are no longer in business, no such option is available. The packaging of mortgage-backed securities into increasingly complex investments adds to the problem.
In separate columns in the Wall Street Journal earlier this month, three respected professors suggested similar ideas. Glenn Hubbard and Chris Mayer of Columbia University suggested that the Bush administration and Congress allow all primary residence mortgages to be refinanced for 30 years at a fixed rate of 5.25 percent. Investors and speculators would not qualify.
Marty Feldstein of Harvard University suggested replacing a portion of residential mortgages with a low-interest loan from the government. The idea behind both plans is to stabilize home prices as a means to rebuild the credit market.
Rep. Barney Frank and Sen. Chris Dodd suggested a similar thing in March, with refinancing through the Federal Housing Administration.
If Sen. McCain is serious about helping homeowners, he’ll flesh out his proposal with an emphasis on simplicity and directing help to those who need it most.