Yesterday, I analyzed Senator John McCain's shockingly liberal proposal -- which he admittedly borrowed from Senator Hillary Clinton -- for the government to commit 1/2 of the bailout funds to purchase mortgages of distressed homeowners and reissue them with more favorable terms. Under the plan, the reissued mortgages would reflect the depreciated value of the homes, thus freeing homeowners from an "upside down" status (i.e., having a mortgage that exceeds the value of the home). Late yesterday, McCain's campaign issued a slight amendment to its original statement, now saying that money to finance the plan would come from several pre-existing pools of money, including funds from the bailout. The basic points of the plan, however, remain the same.
Immediately following the debate, Senator Barack Obama's campaign issued a statement saying that the senator also supports and has advocated having the government buy individual mortgages to help homeowners, "instead of simply purchasing mortgage-backed securities." Nevertheless, after some media outlets said McCain's plan would prove costly, Obama pulled back from the idea. RealClearPolitics has the scoop:
The plan would cause the government "to massively overpay for mortgages in a plan that would guarantee taxpayers lose money, and put them at risk of losing even more if home values don't recover," Obama economic adviser Jason Furman said in a statement. "The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud."
Interesting. First, the bailout legislation, which Obama endorsed, already allows the government to purchase individual mortgages, but it provides very little guidelines on this issue. Instead, the bailout is almost exclusively geared towards helping "the same financial institutions that got us into this mess. . . ." Providing direct relief to homeowners would at least allow them to avoid foreclosure and maintain an important asset. And a specific plan on this issue, however costly, would do more for consumers than the self-serving and empty appeals to homeowner relief contained in the bailout legislation.
Furthermore, it is unclear why the housing market would never turnaround, as Obama's criticism suggests. If and when it does, the risk to taxpayers would diminish. In fact, that's a major premise of the bailout legislation -- that the government can eventually profit from buying risky assets because they will likely appreciate once credit markets stabilize.
Let me be clear: I believe that McCain's "plan" is probably more politics than anything else (as I said yesterday). Polls show that voters do not believe he "feels their pain" or that he knows much about the economy. This has caused him to lose significant ground in the polls. McCain made this proposal in order to change negative voter opinions of him.
But it is contradictory for Obama to take the position that McCain's plan is (a) too costly -- when it would use already committed money from the bailout legislation (and other sources); (b) a gift for unsavory financial institutions -- when the bailout he supports is indisputably a handout to these same reckless companies; and (c) a bad idea because it will cause taxpayers to lose money -- when the bailout authorizes the government to purchase terribly risky debt that the market has essentially deemed "junk." In other words, it is difficult to oppose McCain's plan so vehemently and support the bailout legislation.
I cannot imagine a rational scenario where the government could actually provide direct relief to homeowners in order to stem foreclosures without committing a significant chunk of resources to the cause. McCain's plan could indeed be a political ploy, but it does not differ in spirit from the bailout -- except that it does more for homeowners and provides specifics, rather than grand statements about helping the people.
Obama's biggest concern is that McCain's plan would pay banks the face value of the mortgages but then reissue them to homeowners at lower values. But unless the banks are failing and in distress, it is unclear whether they would accept a much lower offer than the original value of the mortgage. Banks who participate in the bailout will accept less because having the bad debt on their balance sheets precludes them from obtaining credit. But not every bank that holds a mortgage by a distressed homeowner will itself need federal rescuing. Relatively healthy banks will have more leverage to negotiate with the government.
It is also worth noting that the bailout legislation does not even specify how the Secretary of Treasury should value the assets. Instead, it simply requires the Secretary of Treasury to articulate a method that minimizes costs to taxpayers, but that contains enough flexibility for the plan to work. Nicely ambiguous. Because both candidates claim a commitment to helping middle-class people, I wonder whether the Obama campaign will now produce a cheaper plan that helps homeowners. Stay tuned. . . .
No comments:
Post a Comment