The politics of housing have changed in four years.
In 2004, George W. Bush campaigned on a platform of increasing homeownership, especially among minorities. He wanted the government to insure zero-down payment mortgages. “In changing times, ownership can bring stability to your lives,” Bush told a rally in Michigan.
It turns out that homeownership brought instability to the lives of people who bought houses when they weren’t ready. Perhaps as a result, Bush’s potential replacements aren’t running on a platform of extending homeownership. Sen. John McCain, R-Ariz., and Sen. Barack Obama, D-Ill., both offer proposals to let homeowners keep what they have. They have modest goals, born of the bitter experience of the mortgage meltdown.
(If you’re curious about what John Kerry advocated four years ago: His platform called for expanded programs for low-income renters, and restricting subprime lending in general and prepayment penalties in particular. Unlike Bush, Kerry didn’t mention housing in his basic stump speech.)
McCain and Obama agree on the broad outlines of housing policy, and disagree on some particulars.
Where the candidates agree
Both major-party candidates voted for the $700 billion bailout.
McCain said in the second debate that he prefers to call it a “rescue” instead of a “bailout.” “So this rescue package means that we will stabilize markets, we will shore up these institutions,” McCain said.
Obama explained that he voted for the bailout because, otherwise, frozen credit markets “could end up having an adverse effect on everybody,” including mass layoffs.
Both major-party candidates say the government should reduce foreclosures by buying distressed mortgages from lenders and allowing homeowners to refinance into government-insured loans. They differ on who should take the financial hit.
Obama has said that many Americans bear part of the responsibility for the mortgage meltdown. “Part of the reason this crisis occurred, if we’re honest with ourselves, is that everyone was living beyond their means — from Wall Street to Washington to even some on Main Street,” he said in early October.
McCain said something similar in March: “It is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”
Where the candidates differ
Although McCain and Obama agree that the government should buy distressed mortgages, they disagree on who should lose money on the deal.
The Great Bailout gives the Treasury $700 billion and a lot of leeway on how to spend it. The government is giving money to banks in exchange for an ownership stake that can be sold to investors later, and the government can buy distressed mortgage-backed securities. The Treasury has another, more direct option: It can buy individual mortgages on which the borrowers have defaulted. That’s different from buying mortgage-backed securities.
By buying bad mortgages, the government would allow homeowners to refinance their loans for smaller amounts that reflect the reduced values of their homes. Under such a plan, someone has to take a financial loss — lenders, the government or homeowners. The candidates disagree on who should take that loss.
McCain says that, in cases where homeowners were responsible enough to make down payments, the government should eat the loss. The Treasury would pay full price to the investors who own the loans. Under this plan, the homeowner would refinance for a reduced loan amount. The government would accept a loan payoff for that reduced amount, so the government would take the loss. The plan could aid up to 11 million homeowners, McCain says.
“Now, I know the criticism of this: Well, what about the citizen that stayed in their homes; that paid their mortgage payments?” McCain said during the third debate. “It doesn’t help that person in their home if the next-door neighbor’s house is abandoned. And so we’ve got to reverse this. We ought to put the homeowners first.”
McCain compared his proposal to the federal government’s Home Owners Loan Corp., which was founded in summer 1933, at the dawn of Franklin Roosevelt’s administration. In those days, most mortgages were interest-only balloon loans that came due after three to five years. Borrowers expected to refinance their loans before they expired. Similarly, during the housing boom at the beginning of this century, most subprime and Alt-A borrowers expected to refinance before their loans became unaffordable.
In both eras, borrowers and lenders were caught by surprise when home values plummeted, and in both eras, homeowners were unable to refinance out of trouble.
Congress addressed the problem in 1933 by forming the HOLC. According to the book, “History and Policies of the Home Owners’ Loan Corporation,” by Lowell C. Harriss, the federal government eventually bought one-fifth of the nation’s mortgages. About half of the HOLC’s borrowers ended up in foreclosure. Still, the program is considered a success. The HOLC came to an end in 1951, at a slight profit to the government.
Obama says he favors a structure like the new Hope for Homeowners program, in which lenders take the loss. Hope for Homeowners is for delinquent borrowers who owe more than their houses are worth. Under the program, these homeowners get government-insured loans for 90 percent of the home’s diminished value. The original lender loses the difference between the amount of the original loan and the amount of the new loan. The program is optional, and presumably lenders will reject deals in which foreclosure would be less of a money-loser.
Other areas of disagreement
McCain and Obama have some differences on housing-related taxes.
Obama wants to reduce income taxes on homeowners who have mortgages but don’t qualify for itemized deductions. The universal mortgage credit would be a 10 percent credit, up to $800, on mortgage interest for filers who don’t itemize deductions.
The candidates have slightly different approaches to taxes on capital gains from home sales. Right now, if you sell your primary residence, you can make a profit of up to $250,000 if you’re single, or up to $500,000 if married, and not owe capital gains taxes. A capital gain of more than that triggers capital gains taxes in some cases.
If the residence has been owned long enough, the capital gains tax on a house can be zero percent for lower-income taxpayers, or 15 percent for higher-income taxpayers. McCain wouldn’t change that. Obama would keep the capital gains tax rate at zero percent for low-income families and raise it to 20 percent for those with incomes over $250,000. Some filers in the middle might still pay 15 percent.
A scurrilous e-mail has been circulating for months that purports to illustrate Obama’s tax plan. It even fooled a finance professor who was contacted for this article. Among other things, the e-mail says Obama plans to levy a capital gains tax on all home sales, and a tax on all homes over 2,400 square feet. The e-mail is not true.
When it comes to contributions from housing- and mortgage-related corporations, the two candidates are fairly even. According to the Center for Responsive Politics, McCain has raised $4.6 million from the construction industry and $25 million from the finance, insurance and real estate industries.
Obama has raised $3.3 million from the construction industry and $27.4 million from the finance, insurance and real estate industries.
The most infamous executive behind the mortgage meltdown, former Countrywide CEO Angelo Mozilo, contributed to two presidential contenders: Democrat Bill Richardson and Republican Rudolph Giuliani. He gave to neither McCain nor Obama.