McCain Plan Draws Doubts From Experts On Mortgages

Douglas Holtz-Eakin, a senior policy adviser to John McCain, said the candidate's mortgage plan is more substantial than previous plans. The campaign said it could cost $300 billion. (By Jay Mallin -- Bloomberg News)

The FHA, and potentially the taxpayer, would then foot the bill for the difference.

Alan Blinder, a former vice chairman of the Board of Governors of the Federal Reserve, said he and others have supported the government buying loans at a discount and then restructuring them. But buying them at face value is a dramatic departure, he said.

It is "outright loss for the taxpayer," said Blinder, an Obama supporter who said he has answered queries from the Obama campaign. "I don't see why anybody, Republican or Democrat, would want to do that. Ironically, you would be giving the biggest gifts to the lenders who made the worst mortgages."

The losses will grow if home values continue to drop, said Abdullah Yavas, a real estate professor at Penn State University.

"The more the property value goes down, the bigger that loss will be," said Yavas, who is not affiliated with either campaign.

But Holtz-Eakin said taxpayers have to cover the loss because the economy has deteriorated so rapidly. "That's the only way to get a rapid and broad-based response."

About six months ago, McCain pitched a plan in which lenders would have forgiven part of the debt. "In the end, the lenders didn't," Holtz-Eakin said.

The Obama campaign yesterday called the initiative "erratic policymaking" that would have the government "massively overpay for mortgages."

The Bush administration did not comment directly on the plan. Treasury Secretary Henry M. Paulson Jr. and White House spokeswoman Dana Perino said in separate briefings that they had not seen details.

Yesterday, McCain's campaign said its Home Resurgence Plan would target people who financed their primary residence and who did not falsify documents or avoid a down payment. Ultimately, the plan would help stabilize home values, campaign officials said.

Chris Mayer, a real estate professor at Columbia University, said $300 billion won't be enough to achieve McCain's goals.

"There's over $400 billion in negative equity sitting around the country right now and $300 billion is not going to come close to the magnitude of solving the problem," he said.

And, he said, it won't help potential buyers who can't find a loan because credit has dried up.

John McIlwain, a senior fellow for housing at the Urban Land Institute, said that reworking these loans might be the fastest solution to the housing crisis. "But it was not something I expected to hear from a conservative Republican."

During the debate, McCain took ownership of the idea and its costs. "Is it expensive? Yes," he said.

"And it's my proposal," he added. "It's not Senator Obama's proposal. It's not President Bush's proposal."

Staff writer Michael Abramowitz contributed to this report.