Blacks, the Poor, and Democrats Overwhelmingly Endorse McCain's Mortgage Plan

I have written a few entries on Senator John McCain's surprising proposal for a federal buyout of mortgages of distressed homeowners (see, e.g., here and here). Although the bailout legislation authorizes the Secretary of the Treasury to purchase individual mortgages, it is extremely light on details. McCain's plan fills in some of the blanks, but it has received harsh criticism from Senator Barack Obama and the media. Obama has not released an alternative plan.

Despite the cold reception from Obama and the media, "rank and file" Americans actually favor the plan -- particularly blacks, the poor, and Democrats! Rasmussen, the respected pollster, released a survey on this subject today. Here are some highlights:

* 52% of all voters favor the plan

* 59% of Democrats favor the plan, compared to 47% of Republicans
and 49% of Independents;

* 70% of African-Americans versus 50% of whites agree with the
plan.

Will these numbers convince McCain to keep pushing the plan? In an earlier entry, I argued that McCain could use his plan to demonstrate that he differs from Bush and that he can deliver concrete ideas, rather than simply criticism or slogans. The McCain campaign, however, seems tone deaf and unable to follow through with its narratives. Unless McCain stays the course with a working script, he will begin to come across as erratic, as Obama has described him.

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?

Obama Flip-Flop? Rejects McCain's Mortgage Plan As Too Costly

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. . . .