McCain's Mortgage Insanity

From Portfolio:

Well, John McCain didn't waste any time. In response to the first question of the second presidential debate, the Arizonan offered to buy back any mortgage in America that's worth more than the value of the home.

Since maybe as many as 40 percent of the homes in America may be under water--that is, the mortgage is worth more than the home--that's quite a tall order, one that makes the $700 billion bailout/rescue plan look like bubkes. It's a stunning nationalization of mortgages, wild in its cost and implications and somewhat bizarre coming from someone who had tried to pare back Fannie Mae and Freddie Mac. I suspect in the coming days McCain will dial back the plan because it was so outlandishly expensive and such a federal intrusion into the market--not that we're still worrying about that.

Add to that the issue of moral hazard:

Congress’ bill – which Holtz-Eakin says provides at least part of the authority McCain would need to carry out his plan – provided a $300 billion program to help distressed borrowers refinance into cheaper Federal Housing Authority mortgages. But to participate, lenders and mortgage investors would have to reduce the mortgage principal, thus taking a loss on the loan.

Lawmakers argued that the “haircut” would protect taxpayers and mitigate against so-called “moral hazard” that government intervention would encourage lenders to believe they’ll always be rescued from their bad business decisions. To make sure homeowners didn’t get off scott free either, the law requires them to share any future profits from the resale of their homes with the government.

Wednesday, October 8, 2008