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McCain wants to spend $300 billion to buy up bad mortgages; Martin Feldstein behind it

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By Michelle Malkin  •  October 7, 2008 11:07 PM

Scroll down for updates…McCain’s April 15 remarks added below…Economist Martin Feldstein pitched the plan in the WSJ…see response below…

I can’t underscore enough what a rotten idea John McCain’s ACORN-like government mortgage buy-up is. I said it during my liveblog. And I’ll say it again: “HE WANTS TO EXPAND THE BAILOUT. He wants to do what ACORN wants to do. We’re Screwed ‘08.”

This was his supposed “game-changer.” This was the very first thing out of his mouth during the debate tonight — his big pitch right off the bat. The McCain campaign immediately sent out this fact sheet on the proposal, which will cost at least $300 billion. The proposal involves directing the Treasury Secretary to “purchase mortgages directly from homeowners and mortgage servicers.” That’s on top of the trillion-dollar crap sandwich (update - McCain says it would be included in the crap sandwich), the $85 billion to AIG, the $25 billion to automakers, the $200 billion in capital and credit lines to Fannie and Freddie, and who knows what else we’ll be forking over to California, Massachusetts, etc., etc., etc.

He spent the entire debate assailing massive government spending — while his featured proposal of the night was to heap on more massive government spending to pursue home ownership/retention at all costs. If Obama had proposed this, the Right would be screaming bloody murder about this socialist grab to have the Treasury Department renegotiate individual home loans and become chief principal write-down agents for the nation.

As I put it this morning: “Getting credit is not a constitutional right. Preserving home ownership should not be a government imperative to be pursued at all costs. Neither should foreclosure prevention at all costs.”

Read and weep:

AMERICAN HOMEOWNERSHIP RESURGENCE PLAN

John McCain will direct his Treasury Secretary to implement an American Homeownership Resurgence Plan (McCain Resurgence Plan) to keep families in their homes, avoid foreclosures, save failing neighborhoods, stabilize the housing market and attack the roots of our financial crisis. America’s families are bearing a heavy burden from falling housing prices, mortgage delinquencies, foreclosures, and a weak economy. It is important that those families who have worked hard enough to finance homeownership not have that dream crushed under the weight of the wrong mortgage. The existing debts are too large compared to the value of housing. For those that cannot make payments, mortgages must be re-structured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they’ve already suffered.

The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes. By purchasing the existing, failing mortgages the McCain resurgence plan will eliminate uncertainty over defaults, support the value of mortgage-backed derivatives and alleviate risks that are freezing financial markets.

The McCain resurgence plan would be available to mortgage holders that:

· Live in the home (primary residence only)

· Can prove their creditworthiness at the time of the original loan (no falsifications and provided a down payment).

The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner. The direct cost of this plan would be roughly $300 billion because the purchase of mortgages would relieve homeowners of “negative equity” in some homes. Funds provided by Congress in recent financial market stabilization bill can be used for this purpose; indeed by stabilizing mortgages it will likely be possible to avoid some purposes previously assumed needed in that bill.

The plan could be implemented quickly as a result of the authorities provided in the stabilization bill, the recent housing bill, and the U.S. government’s conservatorship of Fannie Mae and Freddie Mac. It may be necessary for Congress to raise the overall borrowing limit.

Read that last paragraph again. He would enact this new spending plan using the authorities provided in the stabilization bill — the same ones I reported on in my special column for the NYPost today championed by Obama’s friends at ACORN.

It’s a great idea…for everyone who bought overpriced homes with Adjustable Rate Mortgages. Those who rented or bought within their means or locked into fixed-rate loans that they can afford are out of luck, naturally.

Question: Will he propose a similar plan for those who bought mutual funds at or near the market top?

Dude, where’s their bailout?

***

Stephen Spruiell gives thumbs down:

Yeah… didn’t Congress just enact major legislation to address this problem? The Housing and Economic Recovery Act of 2008 created a federal mortgage-insurance program for lenders who agree to reduce mortgage payments for struggling borrowers.

How is McCain’s plan different? I’ll try to explain. Let’s say you have a $200,000 adjustable-rate mortgage. Your home’s value has declined, your interest rate has gone up and you can no longer afford to make the payments. Under current law, the government will guarantee your mortgage if your lender agrees to work out a deal with you.

Under McCain’s plan, the Treasury Secretary would buy your mortgage from whoever owns it and then deal with you directly. In many cases, the Treasury Department would already own your mortgage, because it is about to buy up $700 billion worth of mortgage-backed securities. But under McCain’s plan, Treasury would also become your loan servicer…McCain’s plan is redundant, and it would create significant new responsibilities (and costs) for an already-beleagu[e]red agency. I’m not sure what the campaign was thinking.

Let me repeat what I said about this plan in my ACORN column, because every word applies to McCain:

This will radically expand the federal role in meddling with mortgage loans. The key sections mandate that the Treasury “consent” to rewriting loans to prevent foreclosures – not only by reducing interest, but also by cutting loan principal.

Stuck with a $300,000 mortgage you can’t pay? Get the government to wave its magic wand and cut your debt to $150,000.

The deal is only for those who have fallen behind on their mortgages, of course – not for all you chumps who’ve been paying on time.

And it’s a good bet that ACORN mortgage counselors will “help” decide which distressed borrowers benefit, and how.

The group’s housing arm, the Acorn Housing Corp., is already funded with millions of taxpayer dollars to renegotiate loans for low-income people who should have never received them in the first place. Loan modification is ACORN’s bread and butter.

And when the group doesn’t get what it wants, it will sue, protest and shake down until business and government bend again.

Rep. John Culberson (R-Texas) foresees havoc: “Liberals who manage these programs will give away millions of free or reduced homes in neighborhoods all over America to families who could not otherwise afford them.

“The federal government now has the power to create federal housing projects, house by house, in neighborhoods all over America. Just imagine what that means for property values and the safety and security of your neighborhood.”

All this comes on top of the $5 billion ACORN-backed housing bill passed in July, which hands $600 million-plus to ACORN and similar groups to bail out homeowners under water and help countless more risky loan prospects.

During the floor debate on Friday, Reps. Frank and Waters assured Democratic colleagues that they had personally lobbied Treasury Secretary Hank Paulson on these measures and would press him to consent to “do the kind of loan modifications we’ve been urging.”

Waters exulted: “We’re in charge! . . . We own them now.”

If the banks and others that collect payments on these distressed mortgages don’t write down enough loan principal to keep Rep. Frank happy, he threatens hearings and new legislation next year.

He’ll have the backing of ACORN. ACORN President Maude Hurd warns that her “members plan to hold Secretary Paulson accountable and ensure he uses this authority to make streamlined loan modifications a priority for struggling American families.”

What’s next? Principal write-downs on credit cards and car loans? What incentive do responsible borrowers have left to pay their bills on time?

***

Commenter astonerii adds: “It does not matter whether it is on top of the current $700,000,000,000.00 bailout. It is the simple fact that McCain thinks that house prices need to be stabilized by government mandate . That the government has any business at all to do with the price of a home. That the government’s duty is to keep people in their overpriced homes. That the government should discriminate against non home owners by helping establish home prices that are outside the range of many if not most people who work near where the homes are located. The government is not the economy, unless you are communist marxist socialist. Get the God Damned American government out of my pocket and my choices and do it now.”

Andy McCarthy counts the many other ways that McCain’s performance was a disaster.

Andy, I’m with you.

***

Ugh. McCain talked about his home loan plan in April:

These reforms must wait on the next election, but to help our workers and our economy we must also act in the here and now. And we must start with the subprime mortgage crisis, with the hundreds of thousands of citizens who played by the rules, yet now fear losing their houses. Under the HOME plan I have proposed, our government will offer these Americans direct and immediate help that can make all the difference: If you can’t make your payments, and you’re in danger of foreclosure, you will be able to go to any Post Office and pick up a form for a new HOME loan. In place of your flawed mortgage loan, you’ll be eligible for a new, 30-year fixed-rate loan backed by the United States government. Citizens will keep their homes, lenders will cut their losses, and everyone will move on — following the sounder practices that should have been observed in the first place.

***

Reader reaction is pouring in. A few of the best ones:

From e-mailer Danny…

Sorry to say – during tonight’s debate – all I had to hear was: (1) McCain offer additional housing bailouts in response to the 1st question and, (2) a dedicated lack of confrontation in response to (a) Obama’s ‘Bush = McCain’ rhetoric and, (b) lack of willingness to drive a stake into Fannie Mae + Franklin Gaines + Obama & Democrats – that I had to fight myself from turning the TV off.

Clearly – the wrong Republican on the ticket was out there tonight.

What about all of McCain’s talk about “victory”? It matters in Iraq, but not in Michigan, not in tonight’s debate?

Gov Palin sounds like more of the leader I am looking for – not someone to call me “friend” – but someone to show me some fight. If I feel this way – I wonder what our servicemen and servicewomen in Iraq and Afghanistan will think about when they see this performance and truly study it with a critical eye?

Take the gloves off – and put on the brass knuckles.

I will still vote for the McCain-Palin ticket – but only because Gov Palin is on it. Truly, I feel sorry for her. At least she FIGHTS. Sen. McCain’s performance tonight was more like Captain Hazelwood of the Exxon Valdez – playing slalom with icebergs.

Jimmie at The Sundries Shack:

And what about the non-homeowners who have worked hard and decided, responsibly, not to live under the Damocles’ Sword of an Adjustable Rate Mortgage knowing that, at some point, that rate was going to adjust upward and put them in serious trouble?

Screw us, apparently.

Here’s the thing, though. The value of housing fluctuates with the demand for housing. The government is hideously bad in picking the value of anything. Don’t believe me?

The government has been helping to set the value of health care through Medicare for decades. How’s that been working out?…

And from commenter DirkBelig:

While on points tonight’s debate was a draw, in all practicality it was the beginning of the end for the once-great nation of the United States of America.

When is Kathleen Parker going to demand that McCain drop off the ticket to spare Sarah Palin the embarrassment? After Palin finally forced Obama’s radical pals into the light where even CNN had to acknowledge their existence, McCain doddered into the debate tonight and blew it, allowing the pundits on Nightline to declare such talk the desperate actions of a rapidly fading candidate “talking about 40-year-old events when the public is worried about the economy today.” He sent his wingman out on a mission and left her hanging out to dry.

Buying up bad mortgages was his big idea for the evening? Why not just hand him a horn labeled “ME TOO!” for him to honk whenever Obama promised to give everyone (but Mean Rich People) a tax cut and a kitten that will only poop rainbows? Allowing Obama to twist the “he doesn’t understand” riff back on him allowed a demerit on Obama become a slam on McCain that taps into the public’s fatigue with a seemingly-endless war that Dubya never was able to articulate the need for when it counted.

We are four weeks until the Election and the only one speaking the Truth about Obama is Sarah Palin. McCain isn’t getting his message out thru the Treason Media’s filters. Obama’s ACORN cronies are rounding up homeless people to commit voter fraud in Ohio already. With conservatives already leery of McCain and only staying interested because of patriotism and Palin, the longer he shuffles along, the more likely this “imperfect servant’s” last public act will be to deliver the United States into the hands of the fascists and communists that he once fought against and suffered under. I wonder if he even knows how badly he is failing – not only himself, but his country?

Too bad I never developed a taste for therapeutic alcohol because if I did, I’d be self-medicating something fierce now. Cheers!

***

Apparently, some conservatives think this individual home loan mortgage nationalization plan is okay because economist Martin Feldstein proposed it. If you think falling housing prices are the “problem,” then of course you’ll go along with massive government intervention to stop the “crisis.”

I agree with this guy:

This has got to be the stupidest idea I’ve ever heard.

The argument about a low-cost loan cutting back on monthly payments has a tiny degree of merit, but the idea that the homeowner is going to think about his mortgage obligation differently because it is split into two pieces is just plain dumb – especially if the new loan is full recourse and from the U.S. government!

The whole idea of somehow propping up home prices is just sickening and the notion that renowned economists still think the root cause of the current problem is falling home prices rather than the policies that allowed home prices to rise to their previous bubble heights – well, that’s even more sickening.

More reax:

Dumb idea. Only someone with a degree in Keynesian economics would think splitting a mortgage into two parts is somehow “helping” the upside-down borrower.

Plus, anyone who is foolish enough to borrow from the government with full recourse would be asking for trouble. Ask anyone who is behind on their student loan payments. Miss a payment or two and the penalties and interest will multiply the balance due beyond the point where you will ever catch up, and the IRS will garnish your wages to get the money back.

As with any government “deal”, the likely downside far outweighs the possible upside.

***

The trouble with the government changing the terms of existing mortgages is that they will have to totally destroy contract law. Any advantage given to one party in a contract will be a disadvantage to the other party. We will no longer be a country of laws but a country of arbitrary government edicts.

And another view:

Feldstein is nuts. He claims to be worried about “overshooting” on the way down. History shows that declining home prices don’t overshoot the way stocks often do. Instead, the decline slows as prices approach fair value. Then nominal prices stop falling as inflation gradually eats away at the real value of real estate. Nominal prices start rising again only when they have roughly reached fair value. The reason real estate prices don’t overshoot on the way down is because they are sticky upwards.

Feldstein’s concern about overshooting suggests that he thinks the fair value for real estate is a lot higher than it actually is. Notice that he thinks a 15% decline over the coming year would be enough to return housing to reasonable levels. (He’s using real numbers, not nominal. With our current 4% inflation rate, he’s talking an 11% nominal decline over the next year.) Feldstein’s real aim is to prevent a much-needed real estate correction.

Feldstein is a Republican. I thought Republicans were supposed to believe in the free market. I guess they do except for when they don’t.

Yeah, that ship has sailed.

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