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Mortgage Rescue: Where McCain, Obama Stand
Senators both offer proposals to let homeowners keep what they have
By Holden Lewis, bankrate.com Published: 10/28/2008
The politics of housing have changed in four years.
In 2004, George W. Bush campaigned on a platform of increasing homeownership, especially among minorities. He wanted the government to insure zero-down payment mortgages. "In changing times, ownership can bring stability to your lives," Bush told a rally in Michigan.
It turns out that homeownership brought instability to the lives of people who bought houses when they weren't ready. Perhaps as a result, Bush's replacement isn't running on a platform of extending homeownership. Sen. John McCain, R-Ariz., and Sen. Barack Obama, D-Ill., both offer proposals to let homeowners keep what they have. They have modest goals, born of the bitter experience of the mortgage meltdown.
McCain and Obama agree on the broad outlines of housing policy, and disagree on some particulars.
Both major-party candidates voted for the $700 billion bailout.
McCain said in the second debate that he prefers to call it a "rescue" instead of a "bailout." "So this rescue package means that we will stabilize markets, we will shore up these institutions," McCain said.
Obama explained that he voted for the bailout because, otherwise, frozen credit markets "could end up having an adverse effect on everybody," including mass layoffs.
Both major-party candidates say the government should reduce foreclosures by buying distressed mortgages from lenders and allowing homeowners to refinance into government-insured loans.
Obama has said that many Americans bear part of the responsibility for the mortgage meltdown. "Part of the reason this crisis occurred, if we're honest with ourselves, is that everyone was living beyond their means -- from Wall Street to Washington to even some on Main Street," he said in early October.
McCain said something similar in March: "It is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers."
Although McCain and Obama agree that the government should buy distressed mortgages, they disagree on who should lose money on the deal.
The Great Bailout gives the Treasury $700 billion and a lot of leeway on how to spend it. The government is giving money to banks in exchange for an ownership stake that can be sold to investors later, and the government can buy distressed mortgage-backed securities. The Treasury has another, more direct option: It can buy individual mortgages on which the borrowers have defaulted. That's different from buying mortgage-backed securities.
By buying bad mortgages, the government would allow homeowners to refinance their loans for smaller amounts that reflect the reduced values of their homes. Under such a plan, someone has to take a financial loss -- lenders, the government, or homeowners. The candidates disagree on who should take that loss.
McCain says that, in cases where homeowners were responsible enough to make down payments, the government should eat the loss.
The Treasury would pay full price to the investors who own the loans. Under this plan, the homeowner would refinance for a reduced loan amount. The government would accept a loan payoff for that reduced amount, so the government would take the loss. The plan could aid up to 11 million homeowners, McCain says.
McCain compared his proposal to the federal government's Home Owners Loan Corp., which was founded in 1933, at the dawn of Franklin Roosevelt's administration. In those days, most mortgages were interest-only balloon loans that came due after three to five years. Borrowers expected to refinance their loans before they expired.
Congress addressed the problem in 1933 by forming the HOLC. According to the book "History and Policies of the Home Owners' Loan Corporation," by Lowell C. Harriss, the federal government eventually bought one-fifth of the nation's mortgages. About half of the HOLC's borrowers ended up in foreclosure. Still, the program is considered a success. The HOLC came to an end in 1951, at a slight profit to the government.
Obama says he favors a structure like the new Hope for Homeowners program, in which lenders take the loss.
Hope for Homeowners is for delinquent borrowers who owe more than their houses are worth. Under the program, these homeowners get government-insured loans for 90 percent of the home's diminished value. The original lender loses the difference between the amount of the original loan and the amount of the new loan. The program is optional, and presumably lenders will reject deals in which foreclosure would be less of a money-loser.
Distributed by Scripps Howard News Service, www.scrippsnews.com.