When John McCain announced his "new" plan to address the financial crisis by having the government directly buy up troubled mortgages, our first response was "wait a minute...that's already in the bailout bill." And, in fact, the bill does give the Treasury the authority to buy up precisely this type of debt." The TARP authorizes the Secretary of Treasury through Section 3 (9b) to buy "any other financial instrument" that the Secretary of Treasury "determines promotes financial market stability," including "residential or commercial mortgages." The legislation also directs the Treasury to use its new authority to help keep struggling families in their homes. Indeed, word is that Treasury is already exploring how to implement such authority.
As outside economic advisors to the Obama-Biden campaign, we were also aware that his type of effort to restructure mortgages to help keep families in their homes had been something Senator Obama had been calling for since March. Thus our initial conclusion was that this proposal was a rather non-consequential ploy by McCain to provide cover for the fact that he has tended to be either late, on the wrong side, or frenetic and all over the map on policy responses to our current financial crisis.
But today we learned of a detail that makes his plan significantly different -- and much worse. The McCain plan uses taxpayer dollars to buy distressed mortgages at their full, face value from the banks and lending institutions that are currently stuck with them. Only then, after we the taxpayers have fully absorbed the cost to the lender of these troubled loans, does the homeowner get the benefit of the lower principal.
That's right folks...it's private profits and social losses. Instead of an effort to safeguard taxpayers as Senator Obama has called for and the Frank-Dodd bill goes to great lengths to do, this plan takes from taxpayers to provide unjustifiable subsidies to financial institutions - even those who engaged in deceptive or outright fraudulent practices to induce people into homes they could not afford.
What responsible plans like Dodd-Frank do, by contrast, is to include the following critical provisions: First, if lenders want into the plan, they have to agree to "take a haircut," i.e., write down the principal on the loan. This step spreads some of the economic pain around between the lender and the government (taxpayer), who in return for the write down, guarantee that the mortgage will be repaid. Second, Dodd-Frank requires that homeowners who benefit from a lower mortgage and more stable monthly payments share some of the upside benefit with taxpayers when the values of their homes recover. Together, these steps ensure mutual responsibility - that lenders, borrowers and the government each share in the process of stabilizing the housing market while protecting taxpayers to the maximum possible extent. Or then we can go with a "Resurgence Homeownership Plan" and just write checks to financial institutions and hope it trickles back to the rest of us.