National Review Slams McCain Mortgage Plan
Seems like a noteworthy turn of events:
McCain’s plan would also be a gift to lenders who abandoned any sense of prudence during the boom years. Under the Frank-Dodd bill, lenders must agree to “take a haircut” — slang for writing down the value of a mortgage — in order to qualify for federal insurance on a distressed mortgage. The lender bears an initial loss but is protected if the borrower eventually defaults. McCain would transfer that initial loss to the taxpayers. Under his plan, the government would buy mortgage loans at face value and then reduce the principal and interest on these loans to accommodate distressed borrowers. Taxpayers would take so many haircuts we would all look like Britney Spears after a three-day bender. [...]
The Frank-Dodd housing bill has only been in effect since Oct. 1. It gives lenders who own mortgages ample incentive to work out deals with distressed borrowers and avoid costly foreclosures. It also provides liability protection for loan originators who sold their mortgages to Wall Street. These lenders are authorized to work out deals on behalf of investors in mortgage-backed securities (of which the U.S. government is soon to be the biggest). Most important, Frank-Dodd sets reasonable limits on what kinds of borrowers will be eligible for taxpayer assistance.
We never thought we would defend the Frank-Dodd legislation, which we bitterly opposed last summer. But it looks downright prudent compared to what McCain has proposed. McCain’s plan is a full bailout for lenders, and it cannot do much more than the Frank-Dodd bill without letting “ruthless borrowers” and other reckless types off the hook. It is time to acknowledge that the government has gone as far as it can without creating a level of moral hazard that is unacceptable. Give Frank-Dodd — and the Paulson plan — time to work.
I’m not sure that “wait and see” is the best thing to say about this either, but whatever we do some sort of “haircut” is essential. The crux of the matter is that we want to resolve a collective action problem here — at the moment what every lender wants is for every other lender to take a haircut, thus bolstering the market for homes, without needing to do any renegotiating themselves. A smart plan would have everyone do it, spread the pain around a bit, but leave most everyone better off than they would be if we just wait for mass foreclosures and a total cratering of home values.
23 Responses to “National Review Slams McCain Mortgage Plan”
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October 9th, 2008 at 3:02 pm
I think we need to know something of foreclosure projections before launching the Yglesias plan. What If we’re already far along the trajectory? There’s also the moral hazard issue. How do we stop people from deliberately falling behind on their mortgages? Also, the resiliency of American capitalism may well be underestimated: I saw something on the news last night about bidding wars breaking out in certain distressed markets. If we’re going to provide direct relief to homeowners, modifying the bankruptcy laws to allow cramdowns seems the way to go.
October 9th, 2008 at 3:15 pm
When they say “last summer” do they mean two-weeks ago…or am I missing something?
October 9th, 2008 at 3:52 pm
When they say “last summer” do they mean two-weeks ago…or am I missing something?
Yeah, must be that these guys have been losing all of their money during the last couple weeks, so summer seems like a long time ago.
Also these guys believe Jesus gave us the free market and it can do no wrong and everything good flows from it. But lately the free market has been acting like a cracked-out homeless person, so it’s been a long, hard couple of weeks in more ways than one for these guys. Plus, it’s as if McCain is trying to lose.
October 9th, 2008 at 3:57 pm
in the last few days, we have seen krauthammer, david brooks, and george will all go public saying that obama is going to win, and that, in one way or another, they can make their peace with that.
they have done this because they were always conscienceless, spineless, intellectually bankrupt power-whores, and they are hoping to continue their parasitic ways under the new obama administration.
now the national review is coming out against mccain.
hm. i wonder what we can say about them.
October 9th, 2008 at 4:12 pm
Obama is right, McCain just DOESN’T GET IT!
McCain has been consistently WRONG on nearly everything.
October 9th, 2008 at 4:34 pm
I would hope Obama will include Chapter 13 reform in his retort to this plan at the next debate. Chapter 13 doesn’t allow petitioners to get away scot free, in fact, these people end up paying evey non-essential cent they make for 5 years to settle their debts. No vacations, no iPods, no flatscreen TVs. And by allowing judges to modify the mortgages it would give the lenders a big ole haircut. Without costing the taxpayers a cent.
Of course, if McCain gets in, I’ll be able to unload part of my mortgage, which exceeds the value of my condo, now that prices have collapsed. I mean, I can afford to pay it, but if the government is gonna buy it, write it down, and refinance it for me, why on earth would I do that? Thanks to John McCain, I’ll finally get my handout! Yippee!
October 9th, 2008 at 4:42 pm
I think the use of “last summmer” is intended to make it sound like a long time ago, so as to distance themselves from their “bitter opposition” of, you know, a few days ago.
October 9th, 2008 at 4:44 pm
just a question. Why can’t a plan be devised that forces any lender AND borrower that chooses to take advantage of a government “insurance”/”reorginazition” of mortgage in which the government takes some significant percentage of any future sale price of the home, that exceeds the renogotiated price on the house/mortgage?
For instance, if I have a home that has a motgage of $200,000, that will now, because of lower home values be reduced to a mortgage of $150,000, then if sometime down the road sell that house, the government would be entitled to 50% of every dollar the house is sold for over $150,000. This would recover some money for the government, and ensure that people would only take advantage of the program if they absolutely need it. (of course such a plan would have to exclude refinances and sales to family members, otherwise everyone would refinance before selling, or sell to family). Is this a dumb idea?
October 9th, 2008 at 4:52 pm
One of the problems is that something like 40% of modified loans go into foreclosure anyway, and that was in less stressed times. In order to really ward off “mass foreclosures”, you’d need to make the discount of the balance and fixed rate pretty steep, which might well end up causing more losses to the lenders/investors than doing nothing. Indeed, this is one of the main reasons that loan modifications haven’t really got anywhere – servicers are required to minimise total losses and it’s far from certain that modifications do that in more than a small number of cases. Now, if you just want to mitigate the effects of the housing crash and interest rate resets on homeowners, then fine, but it’s very tricky to bail out homeowners and the financial markets at the same time. It’s not quite a zero sum game, but it’s close.
October 9th, 2008 at 9:08 pm
Re: The lender bears an initial loss but is protected if the borrower eventually defaults.
One issue I have with these analyses: the enitity that actually holds the mortgage today is almost always not the lender who signed the note and forked over the cash to the borrower. Many of the lenders are out of business now. The mortgages are held by banks, by the GSEs, by REITs and by Trusts that bought them later. To be sure one can blame these businesses and trust for not doing proper due diligence, but they are guily of foolishness not malice. That’s not say they shouldn’t take a haircut (that’s another argument), but the pitchforks and tar and feathers should be put away.
Re: One of the problems is that something like 40% of modified loans go into foreclosure anyway
Why? If it’s the case that the mortgagers have lost their jobs or become disabled or gotten divorced then it would be foolish to write down the mortgage; such a program should make certain that the borrowers have the income stream needed to make the payments and there are some good old-fashioned standards we can use for that (which should have been in use all along).
A second issue: what about investment properties, which are probably a very large chunk of these problem mortgages? IMO, they should simply be left go into foreclosure though with strict protections for any renters living in them.
November 12th, 2008 at 10:42 pm
I’m just glad mortgage rates are dropping here in Australia, after the constant rises under the previous conservative government, it’s nice to be paying a little less at last!
November 18th, 2008 at 10:24 am
I agree with the above… nice to see a slight downwards trend…
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