McCain’s Homeowner Bailout Plan is Flawed
By Alan Stewart Carl | Related entries in Economy, McCainWhen John McCain first announced his homeowner bailout plan, called the American Homeownership Rescue Plan, the description of the plan indicated that the government would not pay face value for troubled loans but would pay a discounted rate reflecting the declining value of the property. The line used by the McCain campaign was:†Lenders in these cases must recognize the loss that they’ve already suffered.â€
Now, McCain has amended his plan and is proposing to pay face value for the loans. This means that McCain wants to buy loans at their original inflated prices and then issue new loans at a reduced, market-rate-adjusted price. Taxpayers would absorb the losses but both homeowners and financial institutions would come out ahead (The Wall Street Journal explains in more detail and offers their reservations about such a plan).
I always thought McCain was a “share the burden†guy. In many of these cases of bad loans, both the homebuyer and the lender made very poor decisions. While I know that predatory lending did occur, I’m also pretty sure that most buyers understood the risks. They tried to make a home an investment and they lost the gamble. While I sympathize with these people, I don’t feel we have the responsibility to bail them out anymore than we have a responsibility to bail out the financial institutions who failed to do due diligence before issuing these loans. So why does McCain want the taxpayers to suffer the entire burden?
Clearly, McCain wants to 1) show the public he cares about people in trouble and 2) wants to attempt to stop to bleeding before the economy completely hemorrhages. Both noble goals. But this plan is too one-sided. Homebuyers and lenders who made bad decisions should shoulder a fair share of the consequences. As a taxpayer, I am willing to help out but I find the McCain plan fundamentally unfair. Plus, the precedent it sets is horrible and will do little to prevent poor decisions in the future.
McCain should really consider revising his plan yet again.
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October 9th, 2008 at 1:20 pm
Alan, Alan, Alan,
While i agree with your final analysis of the ’simple mistake’ the McCain camp now admits they made concerning the change in the wording of their buyout plan, I think you’re missing the big picture.
First is the erratic behavior of McCain’s campaign. There’s no rhyme or reason. How do you think his latest economic plan would square with the House Repubs when he so ‘heroically’ came to their support against the Feds current economic plan? This new plan would enrage them more than anything for the reasons you mentioned – the moral hazard of letting everybody off the hook. That certainly goes against their ‘Fiscal Conservative’ core.
Secondly, the way it’s set up now, the Fed will try to get stability in the market by obtaining some sort of value for each mortgage backed security. How they will do this is the great mystery everyone’s waiting to see. McCain’s plan would blow that up by preventing the free market to negotiate this crucial dollar amount. Why would the holders of these mortgage securities take pennies on the dollar when this plan- to give them 100% face value- is on the table?
The other thing that further complicates the matter is the Credit Default Swaps that the troubled ‘banks’ got involved in. That’s where the really big bucks were squandered, and they were supposed to minimize risk!. They say that the value of the actual mortgage securities on the books is only about 300 billion (only?) and not that much of it is actually bad debt. How McCain’s plan would deal with those complicated financial instruments nobody knows. I wonder how many in the business really care?
October 9th, 2008 at 2:24 pm
Ben: Hmmm, we seem to be in agreement. Not sure why you think I’m missing the bigger picture. But thanks for the more thorough review of the issue. I was focusing specifically on the McCain plan and not broadly on the existing remedies.
October 9th, 2008 at 6:17 pm
I’ve been leaning toward McCain this entire election, but it seems every time I start convincing myself I can overlook his shortcomings and vote for him anyway, he gives me another reason not to. I haven’t learned much about the 3rd party candidates yet, because I’ve always subscribed to the “that’s throwing away your vote” philosophy. But I think I might check out some of their websites.
October 9th, 2008 at 6:18 pm
McCain’s Homeowner Bailout Plan Is Flawed…
Argues Alan Stewart Carl, a moderate blogger, about Sen. John McCain’s proposal: “When John McCain first announced his homeowner bailout plan, called the American Homeownership Rescue Plan, the description of the plan indicated that the government wo…