What’s in the McCain mortgage plan?

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Can’t pay your mortgage? John McCain says he wants the government to buy your home loan and replace it with a mortgage you can afford, with a lower interest rate and maybe even a lower loan balance.

McCain, the Republican presidential candidate, floated the proposal in Tuesday night’s debate in Nashville. As president, McCain said, “I would order the secretary of the Treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes — at the diminished value of those homes and let people be able to make those — be able to make those payments and stay in their homes.”

On Wednesday morning, the McCain campaign provided more details of the “Homeownership Resurgence Plan.” Then a crucial detail was changed Wednesday night.

Keys to McCain’s proposal
  • The government would buy the loans from the investors who own them.
  • Borrowers would get Federal Housing Administration-insured, fixed-rate mortgages.
  • The new loans would be for amounts equal to or less than the values of homes to, in the McCain campaign’s words, “relieve homeowners of ‘negative equity.” This would require debt forgiveness for borrowers who owe more than their houses are worth.
  • The program would be for primary residences and for homeowners who made down payments and who didn’t lie on their original loan applications.

The cost: roughly $300 billion, according to Doug Holtz-Eakin, McCain’s economic adviser.

Among the controversial aspects of the plan is the role of taxpayers. Holtz-Eakin’s description of the proposal differed in an important detail from the initial outline that was published Wednesday morning on the McCain campaign’s Web site. At first, the Web site said lenders, in cases of debt forgiveness, “must recognize the loss that they’ve already suffered.”

But in a telephone conference call Wednesday, Holtz-Eakin said taxpayers would be on the hook: “… The taxpayers’ contribution would be, in some cases, the difference between the values of those two loans, something which would be the necessity for taxpayer contribution.” Then the Web site was changed to delete the wording about lenders being required to take the losses.

In summary, the McCain campaign initially said the government would buy distressed mortgages at a discount and make investors lose money. Later, the campaign amended the proposal and said the government would pay full price for distressed loans. Under that scenario, investors would not lose money on the bad loans that they had bought and taxpayers would suffer the loss.

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.