McCain Plan Draws Doubts From Experts On Mortgages

By Dina ElBoghdady
Washington Post Staff Writer
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.

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.

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