McCain Reshuffles Rescue Deal

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OCTOBER 9, 2008

McCain Reshuffles Rescue Deal
Proposal Could Help Homeowners but Also Reward Predatory Mortgage Lenders
By JOHN D. MCKINNON

The Wall St. Journal


WASHINGTON -- Sen. John McCain's $300 billion plan to help homeowners struggling with mortgage debt carries big potential benefits for the troubled real-estate sector, but could reduce the funds available for rescuing banks. The proposal, which Sen. McCain announced during Tuesday night's presidential debate with Sen. Barack Obama, also could make winners out of investors -- including predatory mortgage lenders -- that the Bush administration and Congress have tried to exclude from the government's largesse. And it raises knotty administrative questions about how the government would handle potentially huge numbers of mortgage refinancings. Among the challenges: screening out undeserving homeowners who might seek to qualify for help.


The McCain plan highlights the continuing struggles of Washington policy makers -- and Sen. McCain, the Republican presidential nominee, in particular -- in coming up with a workable solution to the interwoven problems of the real-estate and financial sectors. Just two weeks ago, Sen. McCain threw his weight behind House conservatives who wanted to shrink the government's role in the rescue. With this week's announcement, Sen. McCain is seeking to maximize government assistance, while focusing it on homeowners. McCain advisers believe the plan would require no new legislation and is a less-costly prescription for real-estate contagion than buying lots of risky mortgage-related securities, as the recently passed $700 billion rescue measure aims to do. But some analysts said it could drain money away from the rescue effort for banks. The plan focuses on using much of the government's rescue powers to buy individual mortgages that homeowners are having trouble paying.

An earlier mortgage-assistance plan passed by Congress over the summer tried to do something similar, but with a key difference: It forces lenders and investors to take a loss of principal -- a "haircut" -- on the troubled mortgages, in exchange for the government's help. That program appears to be off to a slow start, partly because lenders have been reluctant to accept the large losses they now face on troubled loans, according to analysts.

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The McCain plan envisions combining the resources of last summer's $300 billion housing bill, the $700 billion financial-rescue plan enacted last week, and the still-considerable buying capacity of Fannie and Freddie. If it works as planned, the initiative would help qualifying homeowners and would put a floor under declining housing prices. It also could help banks by shoring up the value of their troubled mortgage-related assets, McCain advisers said. That, in turn, could reduce the need for buying up troubled financial assets. The plan also could free up credit, lowering interest rates and further stimulating the real-estate sector.

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The Obama camp attacked the plan as a poorly designed giveaway to the least-deserving lenders. "It's a huge gift to the least-responsible financial institutions, some of whom have committed fraud, that leaves the taxpayers with guaranteed losses, all of the downside risk, and none of the upside," said Jason Furman, an adviser to Sen. Obama. "It's an example of John McCain being erratic and walking away from the principles that he purported to support as recently as a week ago." It wasn't clear whether the government would share in the eventual profits homeowners might realize when they sell their homes. By relying on existing rescue resources, the McCain plan could reduce the amount of money available for buying financial assets from institutions, said Karen Petrou, managing partner of Federal Financial Analytics.

http://online.wsj.com/article/SB122351316270117559.html (subscription)

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1. And the WSJ Editorial hates it

The Next $300 Billion
John McCain wants your mortgage.


John McCain got the diagnosis right in Tuesday night's debate with Barack Obama -- the economy won't recover until home prices find a bottom. We're less convinced that his plan to buy underwater mortgages at taxpayer expense is the cure this patient needs.

The principle that underlies the idea is not new: If there were some way to halt the tide of foreclosures and distressed sales, the supply of unsold homes should fall and prices should stabilize. If that could be accomplished, investors and lenders alike would have a much clearer idea what the losses would be on mortgages and mortgage securities. That, in turn, would bring buyers back into the market for the mortgage securities and related products that are crippling credit markets.

So far, so good. But can the McCain "Resurgence Plan" get us there? In the past year, we've had other attempts to put a floor under the market by reducing foreclosures. The Treasury's 2007 HOPE program was an attempt to orchestrate voluntary loan refinancings, and the $300 billion Federal Housing Administration mortgage program, slated to start this month, has a similar goal. The "Resurgence" is different, the McCain campaign says, because it is more "aggressive." By this, it means that this one doesn't require lenders or investors to share the pain. Instead, the government will buy the mortgages for their full amount and write a new mortgage that reflects the current (lower) value of the home. The taxpayer -- not the lender or homeowner -- absorbs the losses on loans that exceed the value of the home.

The McCain campaign said yesterday this program would help 10 million homeowners, which is close to the 12 million whose mortgages are thought to be worth more than the current value of their homes. The campaign adds that the $300 billion estimate might be high, since the program could reduce the need to buy mortgage-backed securities under the Hank Paulson rescue plan. On the other hand, home prices are likely to keep falling despite the McCain plan if the economy goes into recession, so the best defense against that is to unfreeze the credit markets more quickly via capital infusions from the Paulson facility. And unlike the Paulson plan, the McCain proposal appears to offer no upside for taxpayers. They take all the losses up front and don't participate in any rebound in house prices, so borrowers who overextended and lenders who made reckless loans are made whole, and taxpayers get the bill. At least the $300 billion FHA program imposes at least a 10% haircut on lenders.

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http://online.wsj.com/article/SB122350990054117367.html?mod=todays_us_opinion