The significance of McCain's mortgage plan

6 Comments to “The significance of McCain's mortgage plan”

1. bdbd Says:
   Wednesday, October 8, 2008 at 10:11 am

   Who would be the lender on the reissued adjusted mortgages? The US govt?

2. Justin Fox Says:
   Wednesday, October 8, 2008 at 11:05 am

   @bdbd: I can't tell. The plan says the government would buy the mortgages, then says the FHA would insure them. That seems redundant if Treasury were to hold onto the mortgages. So I guess they'd sell 'em to Ginnie Mae, which would package them into FHA-guaranteed MBSes and sell them to eager Chinese investors. But to make the plan work Treasury would have to sell them to Ginnie at a significant loss.

3. Don the libertarian Democrat Says:
   Wednesday, October 8, 2008 at 12:33 pm

   McCain's Mortgage Buyout Plan: What Is It?
   Here's Sen. McCain from the debate last night:

   "You know that home values of retirees continues to decline and people are no longer able to afford their mortgage payments. As president of the United States, Alan, I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes -- at the diminished value of those homes and let people be able to make those -- be able to make those payments and stay in their homes.

   Is it expensive? Yes. But we all know, my friends, until we stabilize home values in America, we're never going to start turning around and creating jobs and fixing our economy. And we've got to give some trust and confidence back to America.

   I know how the do that, my friends. And it's my proposal, it's not Sen. Obama's proposal, it's not President Bush's proposal. But I know how to get America working again, restore our economy and take care of working Americans. Thank you."
   Here are some details about Sen. McCain's mortgage buyback plan he talked about last night:

   "The existing debts are too large compared to the value of housing. For those that cannot make payments, mortgages must be restructured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they've already suffered.

   The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes. By purchasing the existing, failing mortgages, the McCain Resurgence Plan will eliminate uncertainty over defaults, support the value of mortgage-backed derivatives and alleviate risks that are freezing financial markets...

   The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner. The direct cost of this plan would be roughly $300 billion, because the purchase of mortgages would relieve homeowners of “negative equity” in some homes. Funds provided by Congress in recent financial market stabilization bill can be used for this purpose; indeed, by stabilizing mortgages, it will likely be possible to avoid some purposes previously assumed needed in that bill.

   The plan could be implemented quickly as a result of the authorities provided in the stabilization bill, the recent housing bill, and the U.S. government's conservatorship of Fannie Mae and Freddie Mac. It may be necessary for Congress to raise the overall borrowing limit."

   Here was Bernanke yesterday about TARP:

   "Second, the $700 billion allocated by the legislation is not an authorization to spend but rather an authorization to purchase financial assets. The Treasury will be a patient investor and will likely hold these assets for an appreciable period of time. Eventually, however, some assets will mature, and the Treasury will choose to sell others to private investors. Financially, in the long run, the taxpayer may come out either ahead or behind in this process; in light of the many uncertainties, no assurances can be given. But the ultimate cost of the program to the taxpayer will certainly be far less than $700 billion."

   Here's the NY Times about the McCain plan today:

   Under the plan, it added, the Treasury would buy unaffordable mortgages directly from mortgage servicers and, in a reflection of the properties' diminished values, renegotiate “manageable, fixed-rate mortgages that will keep families in their homes.” Mr. McCain proposes that the roughly $300 billion cost would be covered by the $700 billion bailout law.

   That $700 billion total, however, was intended to give the Treasury the means to buy and hold troubled assets from financial institutions that might otherwise fail, so that those assets can be sold when markets recover and the assets regain value. But the McCain summary said that “by stabilizing mortgages, it will likely be possible to avoid some purposes previously assumed needed in that bill.”...

   “Is it expensive?” he said of the proposal. “Yes. But we all know, my friends, until we stabilize home values in America, we're never going to start turning around and creating jobs and fixing our economy.”

   While the Obama campaign's reaction indicated that the candidates were in agreement, the mortgage proposal raises a number of administrative questions, given the millions who might seek help. It also raises fairness issues, given the many homeowners who are scrimping in order to continue paying off mortgages based on former market values far higher than their properties' current worth."

   I already said the following about what Bernanke said:

   "3) Challenges:

   A: We don't know exactly how we're going to purchase these assets or for how much ( But we're smart guys, and, once again, there's oversight )"

   So, theoretically, the McCain plan could fit into this, leaving aside the enormous work of identifying whose eligible and negotiating and buying an untold number of mortgages. However, this plan seems to envisage a real loss right at the beginning of it's implementation, thereby violating Bernanke's hold them and sell them rule.

   Or am I missing something?

   Also, it seems worse than the housing bill. Or am I wrong again?

4. bdbd Says:
   Wednesday, October 8, 2008 at 1:08 pm

   @Justin, thanks, now, for the other side of the juggled transaction, what happens to the currently existing MBSs that are out there somewhere and are built up (in part) from the mortgages that are being adjusted and reissued? If the new mortgages are being used to create new MBSs, what becomes of the old MBSs, and do the holders of those old MBSs have any say regarding how the reissuance process takes place (assuming these threads could be meaningfully unraveled and reraveled in the first place)?

5. bdbd Says:
   Wednesday, October 8, 2008 at 1:12 pm

   by the way, Justin, McCain's ramble early on in last night's debate about Fannie, Freddie, mortgage issues and the culpability of Obama/his cronies/Democrats in the current mess was utter nonsense and revealed that McCain has no idea about how these institutions are structured and how they fit into the larger mortgage marketplace, especially in the past few years. Let me repeat, what McCain said was utter nonsense from a strictly factual perspective.

   Shouldn't someone call him out on this? It is shocking to me that a national figure could have such a muddled understanding of this issue and would be willing to rant about it.

6. bdbd Says:
   Wednesday, October 8, 2008 at 4:01 pm

   Brad DeLong helps a bit, http://delong.typepad.com/sdj/2008/10/john-mccains-ne.html

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