What's in the McCain mortgage plan? |
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Buy mortgages, not securities
Two laws that were passed this year -- the housing bill in July
and the $700 billion Wall Street bailout in early
October -- give the Treasury secretary leeway to execute McCain's mortgage rescue plan. Together, the two laws amount to a big toolbox
filled with instruments that the government can choose from. But the current Treasury secretary, Henry Paulson, has given little
indication that he wants to use the financial gizmo that McCain is calling for -- not to the tune of $300 billion.
Paulson initially said that he wants to use the bailout money mostly to buy mortgage-backed securities. That's different
from buying mortgages themselves, which is what McCain advocates. (Now Paulson is talking about investing money directly into financial
institutions, taking an ownership stake in them.)
Most mortgages are bought by investors and bundled into legal entities called trusts, which then issue bond-like securities
backed by the mortgages. This once-lucrative industry is represented by a lobbying group called the American Securitization Forum. A
spokeswoman said the group would not comment on McCain's plan.
In the past, the forum has advocated against any proposal to "cram down" the balances of distressed loans held in a
trust. During the negotiations over the Wall Street bailout bill, congressional Democrats wanted to allow bankruptcy judges to modify
mortgages by changing interest rates or forgiving debt. In his initial proposal, McCain wanted to do something similar, only outside of
bankruptcy court. McCain's revised proposal seems to be more in line with what the Securitization Forum was lobbying for this summer.
The Securitization Forum, along with other trade groups, sent Congress a letter
in September that said debt forgiveness would "increase the risks of mortgage lending at a time when the market is already struggling, and
this will harm consumers by increasing the cost of credit and reducing its availability."
McCain's Democratic opponent, Barack Obama, suggested something similar to McCain's plan during a Sept. 23 news conference,
in which he said, "We should
consider giving the government the authority to purchase mortgages directly instead of simply purchasing mortgage-backed securities. In the
past, such an approach has allowed taxpayers to profit as the housing market recovered."
Obama was referring to the Home Owners Loan Corp., which was formed during the opening days of the New Deal in 1933. The
HOLC bought distressed mortgages and rewrote the terms for borrowers who could afford payments and foreclosed on borrowers who couldn't. In
time, the HOLC owned one-fifth of the mortgages in the country.
The HOLC was liquidated in 1951, at a slight profit to the government.
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