McCain Plan Draws Doubts From Experts On Mortgages
Thursday, October 9, 2008
Sen. John McCain's proposal to have the federal government directly buy and refinance troubled home loans would cost about $300 billion, his campaign said yesterday.
That money would come from the new $700 billion Wall Street bailout and a $300 billion refinancing program enacted as part of a housing bill adopted this summer.
Many details of the plan were unclear yesterday, but the few that emerged led some mortgage industry experts to criticize the plan as flawed and say that the $300 billion estimate is unrealistic given its scope and the magnitude of the housing crisis.
McCain talked about the plan during this week's debate with Democratic presidential rival Sen. Barack Obama. He said that as president he would order the Treasury Secretary to "immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those loans."
The idea of having the government buy bad loans and rework them has surfaced before. McCain floated the concept months ago and Obama pushed a similar idea as recently as September. But Douglas Holtz-Eakin, McCain's senior policy adviser, said this version is more substantive.
McCain said he wants to buy the mortgages and refinance them into more affordable 30-year, fixed-rate loans backed by the Federal Housing Administration.
Under the $700 billion bailout plan, the Treasury Department already has authority to buy residential mortgages as well as mortgage securities. And under the housing bill, the FHA already can refinance troubled loans, building on an effort underway since last year.
But the problem is this: Many borrowers these days are struggling because they are under water, meaning they owe more than their homes are worth. Helping them has proved tricky because someone has to take a financial hit in bailing them out.
To protect itself, when the FHA gets involved now with refinancing a troubled mortgage, it will insure a loan for only up to 90 percent of the home's current value. Lenders must voluntarily agree to forgive the rest of the debt for borrowers who have no equity.
Many lenders have resisted, which explains why only 1 percent of the 369,000 people who have refinanced through the FHA in the past year were delinquent.
McCain plans to overcome lender resistance by bypassing them, Holtz-Eakin said yesterday.
That means the government could end up buying these loans at face value. For instance, it may potentially buy a loan in which the borrower owes $250,000 on a home that's worth $200,000.