In a debate that featured rehashed candidate positions, one new policy emerged: Sen. John McCain’s proposal to have the government buy and renegotiate what his top adviser later said would be “literally millions” of mortgages on houses whose values have dropped and whose owners are struggling to keep up with payments.
Taxpayers would cover the difference between the original loan and the new one, at a cost the McCain campaign estimated to be at $300-billion.
“Is it expensive? Yes,” McCain said during the debate on Oct. 7, 2008. “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.”
In announcing the plan amid the question-and-answer of a town hall meeting, McCain sought to make clear that this was a bold, new idea all his own: “And it’s my proposal, it’s not Sen. Obama’s proposal, it’s not President Bush’s proposal.”
The question is whether or not McCain's proposal is as original as he claims.
But first, some details on the plan.
“Mechanically, the initiative is very simple,” said Doug Holtz-Eakin, senior policy adviser for the McCain campaign. “A homeowner would initiate the process by calling a mortgage broker or other originator and basically saying, 'I’d like to refinance my home,’ and they would start the underwriting process, verify incomes.”
The government loans would be available to mortgage holders who:
• Live in the home as a primary residence.
• Can prove their creditworthiness (and made a down payment at the time of the purchase).
The FHA would then issue a 30-year fixed rate mortgage at a rate Holtz-Eakin estimated would be “in the low 5 percent” range. Mortgage rates for 30-year fixed home loans are currently about 5.82 percent.
Taxpayers would pick up the difference between the value of the two loans.
While at least part of the expense of McCain’s plan would be borne by the recently approved $700-billion bailout plan, the initiative also would tap some of the $300-billion tied to the Housing and Economic Recovery Act passed this summer. That’s a plan that seeks to refinance loans for low- to moderate-income homeowners struggling to pay for homes they bought for more than they are now worth.
The McCain plan outlines a dramatic shift in emphasis for the $700-billion bailout plan. While the bailout contained provisions to allow the Treasury to purchase mortgages directly, the legislation primarily was intended as a means for the government to buy troubled assets from financial institutions that might otherwise fail and that could later be sold when the markets recover.
The hope, said Holtz-Eakin, is that McCain’s “bottom level up” plan will offset the need for some of that $700-billion.
When McCain announced the plan at the debate, Obama supporters were quick to note that Obama had in previous weeks recommended that the bailout plan include the option of buying individual mortgages. “We can’t simply bail out Wall Street without helping the millions of innocent homeowners who are facing foreclosure — or, for that matter, are seeing their home values decline,” Obama said.
McCain argued, during the debate and afterward, that his proposal is nothing like what Obama talked about. And after hearing details the next day, the Obama campaign agreed with McCain.
Obama has always supported plans to have the government buy loans at market prices (in other words, the loan companies would have to swallow some loss), said Obama campaign economic policy director Jason Furman. And homeowners would have to share some of the profits should the value of the home rise. But McCain's proposal wouldn't do either of those things. The government would refinance homes at their new, lower value and absorb the loss in propoerty values entirely.
Okay, so who's idea is it?
Charlie Black, a senior adviser to McCain, told the New York Times the mortgage renewal idea actually originated with Sen. Hillary Rodham Clinton, who borrowed it from a Depression-era New Deal agency, the Home Owner’s Loan Corp.
Clinton spoke about her plan before Congress on Sept. 18, 2008. "A new government entity like the HOLC with a focus on attacking the source of the problem can serve the purpose of clearing a lot of those toxic mortgage securities from the market," Clinton said. "We know there will not be any semblance of a normal or orderly marketplace until we have found a way to resolve these mortgage securities that are metastasizing in the bottom of our markets. By taking this paper out of the market and quarantining it in this new entity we will be able to give the market breathing room to recover. We will also be able to set the stage for an orderly sale of these securities and in turn allow some of them to recover and actually regain some of their value. Perhaps just as importantly, not only would our financial markets stabilize but so would our housing markets."
Although Clinton did not offer specifics of her plan, she seemed to suggest that it would entail buying mortgages at discounted current market rates, and that taxpayers might ultimately turn a profit on them.
That's not McCain's plan.
So here's where we stand: It's true that terms of the $700-billion bailout plan first initiated by President Bush contains authority for the Treasury to purchase mortgages directly. And it's true that Obama has called for a component of the buyout plan to include direct purchase of mortgages to alleviate homeowners struggling to make payments. Finally, it's true that Clinton sketched out a plan last spring that shared some of the goals and traits of McCain's proposal.
The method McCain proposes — buying mortgages at their original value and renegotiating at the current market value (with taxpayers picking up the difference) — is indeed new. But while McCain can rightly take credit for the details of his proposal, he is by no means alone with the idea of having the federal government buy mortgages directly. We rate his statement Mostly True.