Election 2008

McCain mortgage plan
Jim Bourg/AP

McCain’s Mortgage Plan Meets Tough Crowd

October 10, 2008 06:15 PM
by Josh Katz
Mounting criticism against Sen. John McCain’s mortgage plan is coming from his Democratic opponents, as well as from Republicans.

Reactions to McCain’s Plan

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The reaction to John McCain’s plan to buy up mortgages has not been one of praise. Both Democrats and Republican have joined in on the criticism of the American Homeownership Resurgence Plan that McCain unveiled during Tuesday’s town hall-style presidential debate. Republicans are objecting that the plan frees lenders and borrowers of personal responsibility, while Democrats argue that the essentially liberal endeavor favors Wall Street at the expense of the taxpayer, Politico reports.

The funds for McCain’s plan would most likely come from the $700 billion rescue package. According to The Boston Globe, “That plan allows the Treasury Department to buy bad mortgage-based debt, but not directly from homeowners,” like McCain’s plan.

By Wednesday, the McCain campaign had changed the words of the plan. Although only one sentence was removed from the document, it was a crucial one. The final paragraph of the original plan said that banks and other lenders of mortgages must take a hit if the borrower cannot fully repay the loan. “Lenders in these cases must recognize the loss that they’ve already suffered,” it said. In other words, the government would purchase the mortgages, but at a discounted rate.

But under the new version, the government would pay face value for the mortgages. With home values declining, the government would be usurping the loss that the lenders would have had to pay, placing more burden on taxpayers in the form of $300 billion.

According to his economic adviser, Douglas Holtz-Eakin, McCain believes that the plan will help homeowners more so than the bailout program approved by Congress last week. But one of the main criticisms of the plan is that it is too vague.

Under the plan, the government would pay off the original loans and provide homeowners with 30-year fixed rate mortgages at about 5 percent. Some experts argue that taxpayers will have to pay more than $300 billion to fund the mortgage shortfalls.

Sen. Obama has attacked McCain’s proposed mortgage plan this week on the campaign trail. At a rally on Thursday morning, Obama said that the plan makes sure "the taxpayers would lose,” CNN reports. At the same time, he argued, lenders would benefit. According to The Boston Globe, he called McCain’s move “erratic;” Obama is in favor of permitting bankruptcy judges to change mortgages.

Obama recently released a campaign video in which a narrator says, “McCain would shift the burden from lenders to taxpayers, guaranteeing a loss of taxpayer money. Who wins? The same lenders that caused the crisis in the first place. Putting bad actors ahead of taxpayers? We can't afford more of the same,” The Washington Post reports.

McCain contends that his plan benefits “Main Street” more than the government bailout does, and he “is hoping the plan will resonate with moderate and undecided voters,” according to CNN.

Opinion & Analysis: Debating the merits of McCain’s mortgage plan

Matt Lewis, a contributing writer for the conservative Web site Townhall.com, told CNN, "Liberals who might actually be inclined to support a welfare check such as this are already going to vote for Barack Obama, and conservatives, who view this as irresponsible and even apostasy, are turned off by it," Lewis said. "This is both bad policy and bad politics."

Even the conservative National Review upbraided the plan, saying it lets negligent lenders and borrowers off the hook. “There must be a limit to the level of reckless behavior we are prepared to reward in a given bailout, especially if we are only improving on previous bailouts in a marginal way.” The National Review claims that the Frank-Dodd bill, which the publication opposed last year, will probably be more effective than the McCain plan, because it at least requires the beneficiaries to meet higher standards. 

Conservative critics also berate McCain for adopting such a liberal plan and turning his back on earlier statements. For example, McCain economic adviser Douglas Holtz-Eakin claims that McCain hatched the plan in March. But in a March speech McCain said, “[I]t is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers. Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy,” Politico reports.

Another main criticism of McCain’s plan is that it simply won’t work because the housing loans have been sold and resold so many times. “The vast majority of the toxic home loans that are clogging financial markets and freezing up credit have been sliced, diced and repackaged into complex investments that the government would be hard-pressed to unravel and buy,” the Associated Press writes.

Some see the American Homeownership Resurgence Plan as a ploy to shake up the election at a time when Sen. Obama is taking a greater lead in the polls, less than a month before Election Day.

“It would really frighten me if he actually thought this was good policy,” said Dan Mitchell, a senior fellow at the libertarian Cato Institute, according to Politico. “I assume that it’s nothing but a desperation ploy” to give the impression that they are doing something “big and bold,” he said.

Larry Sabato, director of the University of Virginia’s Center for Politics, called the plan “half-baked” and not well thought out, according to Politico.

Marc Ambinder of The Atlantic wonders if McCain’s plan is even legal. The government’s $700 billion rescue plan might actually bar the government from buying “distressed mortgages at face value from banks and renegotiate their terms with homeowners,” Ambinder writes. “So—if the bank gave you a 100 dollar loan … and sold it for 80 bucks last year, and it's trading at 50 dollars now, the law prohibits the government from buying it at $100—face value—because that would ‘unjustly enrich’ the entity which purchased the mortgage from the bank.”

It’s not all bad for the mortgage plan, however. Holtz-Eakin argues that McCain’s plan does a better job of tackling the mortgage issue than the bailout plan. He claims that the mortgage issue is at the center of the economic crisis, and repairing it would create stability.

Alex J. Pollock of the American Enterprise Institute argued that the lack of specifics is not problematic. “Ideas go from the general to the specific, not the other way around,” he said.
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