Wednesday, October 8, 2008

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.

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