At tonight’s debate, McCain proposed a new program under which the government would buy mortgages directly from homeowners. Here is how he put it:
As president of the United States, Alan, 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.
Yeah… didn’t Congress just enact major legislation to address this problem? The Housing and Economic Recovery Act of 2008 created a federal mortgage-insurance program for lenders who agree to reduce mortgage payments for struggling borrowers.
How is McCain’s plan different? I’ll try to explain. Let’s say you have a $200,000 adjustable-rate mortgage. Your home’s value has declined, your interest rate has gone up and you can no longer afford to make the payments. Under current law, the government will guarantee your mortgage if your lender agrees to work out a deal with you.
Under McCain’s plan, the Treasury Secretary would buy your mortgage from whoever owns it and then deal with you directly. In many cases, the Treasury Department would already own your mortgage, because it is about to buy up $700 billion worth of mortgage-backed securities. But under McCain’s plan, Treasury would also become your loan servicer.
To say this would pose enormous logistical challenges would be an understatement. Last I heard, the Treasury Department had its hands full:
The Treasury Department this week plans to start outsourcing the management of up to $700 billion in troubled securities, using special contracting authorities that enable it to retain private portfolio managers, custodians and other financial services consultants without following standard acquisition procedures.
In English, that means that a lot of the same Wall Street guys who made bad investments in mortgage debt are going to be in charge of their own bailout.
If Treasury were also to become the loan servicer for hundreds of thousands of mortgages, it would have to outsource those duties, too. And those jobs would go to a lot of the same people who lowered their lending standards during the housing boom, put people in mortgages they couldn’t afford and then sold those mortgages to Wall Street.
McCain’s plan is redundant, and it would create significant new responsibilities (and costs) for an already-beleaguered agency. I’m not sure what the campaign was thinking.