McCain Proposes A Progressive Housing Policy, But Still Wants To Reward Bankers Who Made Bad Loans

During the presidential debate last night, Sen. John McCain (R-AZ) announced that, if elected President, he “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,” in order to enable troubled homeowners to stay in their homes:

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.

Is it expensive? Yes. But we all know, my friends, until we stabilize home values in America, we’re never going to start turning around and creating jobs and fixing our economy. And we’ve got to give some trust and confidence back to America.

McCain’s plan — the American Homeownership Resurgence Plan — is a good step because he recognizes what he failed to understand before: the mortgage crisis is at the root of the current financial trouble. As the Associated Press noted today, McCain’s plan is akin to one proposed by the Center for American Progress (CAP), which has “been pushing a similar idea for some time.”

In December, 2007, CAP’s Andrew Jakabovics proposed a plan modeled on FDR’s New Deal era Home Owners Loan Corporation. Under the CAP proposal, the government “would issue new, fixed-rate mortgages to those borrowers ‘underwater’ and facing default or foreclosure,” while buying “the old adjustable-rate mortgages from lenders and investors” at current value.

McCain should be applauded for embracing the progressive goal of helping homeowners with decent credit, who are nevertheless burdened with bad mortgages. However, he wants to buy the mortgages at full face value, which means he “wants to give $100 billion of taxpayers’ money to America’s worst-behaving mortgage financiers.”

Here’s how McCain’s proposal works:

– If a homeowner bought a house for $300,000 — and the value then fell to $200,000 — McCain would have the government purchase the mortgage for $300,000, instead of forcing lenders to accept the loss and renegotiate the loan.

– The only way in which the government then makes a profit is if the house’s value rises above its original market value of $300,000, which is possible, but unlikely.

As Matthew Yglesias wrote, “instead of having the lenders take a haircut in order to avoid mass foreclosures, McCain wants the taxpayers to bear all the costs of doing so.”

Brad DeLong noted that McCain plans to “give a present of $100 billion to the bankers who made the loans,” and “acquire and regularize the mortgages of only two-thirds as many homeowners as could have been accomplished if the $300 billion were invested wisely.”

McCain’s idea to buy and restructure mortgages is a good one, but he can accomplish it without overpaying and rewarding bankers who made bad loans.

Cross-posted at Think Progress.