Seems like a noteworthy turn of events:
McCain’s plan would also be a gift to lenders who abandoned any sense of prudence during the boom years. Under the Frank-Dodd bill, lenders must agree to “take a haircut” — slang for writing down the value of a mortgage — in order to qualify for federal insurance on a distressed mortgage. The lender bears an initial loss but is protected if the borrower eventually defaults. McCain would transfer that initial loss to the taxpayers. Under his plan, the government would buy mortgage loans at face value and then reduce the principal and interest on these loans to accommodate distressed borrowers. Taxpayers would take so many haircuts we would all look like Britney Spears after a three-day bender. [...]
The Frank-Dodd housing bill has only been in effect since Oct. 1. It gives lenders who own mortgages ample incentive to work out deals with distressed borrowers and avoid costly foreclosures. It also provides liability protection for loan originators who sold their mortgages to Wall Street. These lenders are authorized to work out deals on behalf of investors in mortgage-backed securities (of which the U.S. government is soon to be the biggest). Most important, Frank-Dodd sets reasonable limits on what kinds of borrowers will be eligible for taxpayer assistance.
We never thought we would defend the Frank-Dodd legislation, which we bitterly opposed last summer. But it looks downright prudent compared to what McCain has proposed. McCain’s plan is a full bailout for lenders, and it cannot do much more than the Frank-Dodd bill without letting “ruthless borrowers” and other reckless types off the hook. It is time to acknowledge that the government has gone as far as it can without creating a level of moral hazard that is unacceptable. Give Frank-Dodd — and the Paulson plan — time to work.
I’m not sure that “wait and see” is the best thing to say about this either, but whatever we do some sort of “haircut” is essential. The crux of the matter is that we want to resolve a collective action problem here — at the moment what every lender wants is for every other lender to take a haircut, thus bolstering the market for homes, without needing to do any renegotiating themselves. A smart plan would have everyone do it, spread the pain around a bit, but leave most everyone better off than they would be if we just wait for mass foreclosures and a total cratering of home values.