Enough Criticism, Senator Obama. Where Is Your Plan to Help Homeowners?

Today, just about every major media outlet and blog deeply scrutinized Senator John McCain's stunning proposal to commit federal funding to purchase mortgages of distressed homeowners and reissue them with more favorable terms. McCain, who admitted borrowing the idea from Senator Hillary Clinton, has altered the plan somewhat during the day, but it remains the only standing plan among the two candidates that details a strategy for providing direct assistance to homeowners.

McCain's plan certainly deserves scrutiny. First, it seems like a calculated political ploy designed to grab voters who are not sold on his ability to manage the economy. Second, there are legitimate valuation and feasibility issues that cloud the plan. Accordingly, I am happy to see specialists examine the fine print.

I am shocked, however, that the media have not asked the following question of Obama: Senator Obama, where is your plan? Today, Obama, armed with press accounts, came out swinging hard against McCain's plan. He did not, however, offer an alternative approach. This is surprising because one of Obama's most salient messages during the recent economic upheaval is that he, not McCain, understands the economy, will bring change from the last eight years, and would protect the middle-class. He even lambasted McCain for not specifically saying "middle-class" during the first presidential debate. Yet, his campaign has not designed a mortgage plan for distressed homeowners. Liberals and progressives should demand more. Saying middle-class does not pay the mortgage.

We should definitely want more details from Obama in light of the fact that:

1. He voted for the bailout legislation which actually authorizes the federal government to purchase individual mortgages and minimize foreclosures. The statute, however, is extremely light and vague when it comes to homeowner relief. It is almost exclusively aimed at providing relief to companies. Essentially, Congress has delegated authority to the executive branch to promulgate rules for helping homeowners. Accordingly, I would like to see how both candidates would "fill in the blanks."

2. Obama is rightfully concerned with the cost of McCain's plan. But Obama voted for the bailout legislation, which leaves it to the Secretary of Treasury to determine how to value assets the government purchases under the plan. Accordingly, I would like to see how an Obama administration would value these assets and how the terms of a reissued mortgage would look. Right now, I assume that Obama would not pay full value for the mortgages and then reissue them at the current, depreciated market value. Beyond that, he has not specified what he would do. Regardless of the merits of his plan, McCain has put the cards on the table. I commend McCain for doing this, even though I do not share his political ideology and even though I'm convinced that this is a political tactic.

I am not a Republican, and my political leanings are much more in sync with the Democrats, than the Republicans. Nevertheless, I want my party's candidate to create a specific plan for homeowners, rather than simply criticize McCain on this important issue. More importantly, I want the media to ask tough questions of both candidates. Candidates have no incentive to answer questions not asked of them. So unless the big networks take on this issue we will only hear from McCain, who had to do something to get voters' attention. My cynical side tells me that McCain is just playing politics, and my understanding of economics leads me to question its feasibility, but at least it's a plan. That must count for something, right?

Out of Left Field: McCain Wants Feds to Purchase Individual Mortgages And Provide Relief for Homeowners!

Senator John Main surprised me during last night's debate, by sounding more Democratic than most Democrats at one point. McCain outlined a plan that would require the government to use 1/2 of the $700 billion bailout money to purchase individual mortgages -- rather than mortgage-backed securities -- and then reissue them to homeowners under more favorable terms. McCain even argued that the government should take into account the diminished market value of the homes when renegotiating the terms of the mortgages. Of course, to some extent, this idea would treat homeowners almost like the bailout treats the banks because it would allow them to escape the consequences of entering into a bad transaction.

Democrats Have Also Sought Homeowner Protection

Democrats have made similar suggestions in the past. During bailout negotiations, for example, Senator Obama said that Congress "should consider giving the government the authority to purchase mortgages directly instead of simply purchasing mortgage-backed securities" and that he would "encourage Treasury to study the option of buying individual mortgages like we did successfully in the 1930s" (see this article ). Obama's statements, however, fall short of making an actual proposal.

One other influential Democrat, Senator Hillary Clinton, also argued for homeowner relief during bailout negotiations. In fact, Clinton was the only lawmaker who came up with a specific plan on this matter during the bailout discussions. Clinton, like McCain, outlined a plan for the formation of a specific governmental entity to buy mortgages from distressed homeowners to help them save their homes.

Bailout Legislation Contains Very Little For Homeowners

The bailout legislation allows the Secretary of the Treasury to buy "troubled assets," and the statutory definition of a troubled asset includes "residential mortgages." Presumably, the Secretary of the Treasury already has the power to provide some relief to homeowners under the legislation. But the legislation only requires the Secretary of the Treasury to come up with a plan "that seeks to maximize assistance for homeowners." The vast majority of the legislation outlines the specific parameters and procedures the government must use to assist banking and corporate entities, not individual homeowners.

Furthermore, the legislation does not allow judges in bankruptcy proceedings to renegotiate the terms of mortgage debt. Currently, bankruptcy judges can do this with all debt -- except for mortgages. Although labor and consumer groups favored including bankruptcy relief in the plan, the banking lobby and Republicans strongly resisted this idea. Key Democrats, including Obama, refused to fight for inclusion of such a provision, which would potentially have alleviated the burdens faced by some distressed homeowners.

Also, most experts expect that the bailout funds will finance the purchase of mortgaged-backed securities, not individual mortgages. Because many other investors, in addition to the government, will likely have a contractual stake in the securities, it is difficult to imagine how the government will be able to alter the terms of the underlying mortgages bundled together to form the securities.

If All of These Big Players Wanted Homeowner Relief, Why Does the Bailout Only Help Wall Street?

Because of the limited attention to homeowners in the bailout legislation, proposals like the ones outlined by McCain and Clinton (and presumably favored by Obama) would provide more concrete assistance to homeowners. This raises a very important question: If such powerful senators as Obama, Clinton and McCain really wanted direct assistance for homeowners, why does the bailout legislation fail to provide such relief? Are these individuals, particularly Clinton and Obama, simply saying what they believe their constituents want them to say? Is McCain simply trying to convince voters that he feels their pain, whether he does or not? Or, are these powerful leaders truly committed to helping consumers, but caved to corporate interests in both of their parties in order to secure passage of the bailout? Perhaps they knew that, despite the grand and moralistic statements by their colleagues in Congress, relief for "Main Street" would have faced much tougher resistance than relief for Wall Street? I'm going with a mixture of all of these things.

Update: A New York Times article, published after I wrote this essay, confirms that McCain borrowed the idea from Hillary Clinton.

READING THE FINE PRINT: BAILOUT IS STILL A DEAL PRIMARILY FOR BANKERS

I read through the bill and intended to write a full analysis. Fortunately, ABC News has captured some of the same concerns I had: Does the Bailout Ignore Homeowners, Execs?



Although Pelosi, Reed and other members of Congress announced with much fanfare that the legislation would include "relief" for homeowners and cap corporate salaries, the proposed legislation only moderately delivers those promises. For example, the limit on executive salary only applies if the government purchases $300 million or more in assets from the company. Although the bill would prohibit "golden parachutes," it would exempt existing employment agreements from this provision. The proposed legislation would only impose additional tax burdens on companies that pay extremely high salaries; it would not explicitly limit those salaries.



As for homeowners struggling to pay their mortgages, the proposed legislation would only help those persons whose mortgages the government purchases. Also, the legislation only requires the Secretary of the Treasury to write a plan to "mitigate" foreclosures and to help funnel distressed borrowers through existing assistance programs. The bill does not provide any money at all for foreclosure prevention.



I heard Dennis Kucinich rail against the bill today on C-Span. It was a great speech. Also, true conservatives in the House (i.e., those who hate "big government") seem bothered as well. But the Senate seems bent on getting the bill passed. After all, it probably will help the economy somewhat, but most importantly, two members of the Senate are running for president. Their colleagues do not want voters to view their respective parties as responsible for blocking a bill designed to save banks (or was it "the" economy?). Tune in for more updates.