Mr. McCain's Mortgage Offer

Thursday, October 9, 2008

IT WAS ONLY a couple of weeks ago that Sen. John McCain announced a dramatic decision to suspend his campaign and rush to Washington for a summit on the proposed financial rescue package. Tuesday night, he again demonstrated a flair for the dramatic, using his debate with Sen. Barack Obama to unveil a plan to buy large numbers of troubled mortgages. Mr. McCain's proposal is aimed at a real problem: Housing triggered the broader financial crisis, and new statistics from Moody's show that falling prices have left one-sixth of borrowers "under water" -- owing more on their homes than their current market values. But it's less sure that Mr. McCain has identified the right cure.

Dubbed the American Homeownership Resurgence Plan, Mr. McCain's proposal would cost $300 billion and target homeowners who are either delinquent on their mortgages or are likely to fall behind soon, provided they made a significant down payment and offered documentation of their income and assets when they purchased. The Treasury, using authority contained in the recently passed financial rescue package, would buy their mortgages at face value and replace them with government-guaranteed loans at more affordable rates. As Mr. McCain's economic adviser, Douglas Holtz-Eakin, explained to reporters yesterday, the goal would be not only to stabilize home prices and shore up household finances but also to remove bad debt from bank balance sheets, thus easing the broader financial crisis.

The McCain plan raises the serious concerns that plague all such ideas: It would benefit borrowers and lenders who made bad decisions and, at least as Mr. Holtz-Eakin described it, it lacks a clear mechanism for reassembling and extricating whole mortgages from the welter of securities "tranches" into which Wall Street slices and dices them. It would also be very expensive, since Mr. McCain proposes to pay face value for the loans. This is in contrast to an already-existing federal plan, Hope for Homeowners, enacted in July and effective since Oct. 1, that will purchase troubled loans. This program pays less than face value, and it calls on both lenders and borrowers to make concessions to the government.

Though Mr. McCain preached against moral hazard earlier in this campaign, his team now says that the crisis has overtaken such concerns and that it's appropriate for government to pick up the tab for selected homeowners' lost equity. But unless Mr. McCain can demonstrate that this concession to borrowers is needed to alleviate the crisis and would be more effective than other measures already adopted by the Bush administration, the cost will be hard to justify.

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