McCain’s 300 Billion Dollar Mortgage Bailout Nightmare

by John Hawkins | October 8, 2008 12:55 am

Last night on my radio show[1] (which you should definitely listen to right now), I said that McCain should turn the bailout into an opportunity to play to his strength: fiscal conservatism. I suggested that he…

#1) Call for a freeze on federal spending, which is something Obama says he won’t do. So, hit him on it. (McCain did this.)

#2) McCain also needs to hit the Dems on Fannie Mae/Freddie Mac and promise to reform them. There are real differences there. You put Obama in there and we will be right back in the same place again in four years, doing another bailout. (He did hit the Dems on Fannie Mae and Freddie Mac, but didn’t do a good enough job of it. The key point should be that if Obama and the Dems deny that Congress strong-arming Freddie & Fannie into giving shaky home loans had anything to do with the crisis, how are they going to be able to fix it?)

#3) Here’s a promise that will win a lot of votes: no more bailouts. Put John McCain in the White House and he’s not bailing out any other companies. He supported the bailout, but it was a one time thing.

McCain not only didn’t do number three, he went in exactly the opposite direction. He’s promising what looks to be another bailout to the tune of 300 billion dollars and it involves nationalizing bad mortgages. Here’s the McCain campaign’s explanation of what they want to do,

AMERICAN HOMEOWNERSHIP RESURGENCE PLAN

John McCain will direct his Treasury Secretary to implement an American Homeownership Resurgence Plan (McCain Resurgence Plan) to keep families in their homes, avoid foreclosures, save failing neighborhoods, stabilize the housing market and attack the roots of our financial crisis. America’s families are bearing a heavy burden from falling housing prices, mortgage delinquencies, foreclosures, and a weak economy. It is important that those families who have worked hard enough to finance homeownership not have that dream crushed under the weight of the wrong mortgage. The existing debts are too large compared to the value of housing. For those that cannot make payments, mortgages must be re-structured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they’ve already suffered.

The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with m anageable, fixed-rate mortgages that will keep families in their homes. By purchasing the existing, failing mortgages the McCain resurgence plan will eliminate uncertainty over defaults, support the value of mortgage-backed derivatives and alleviate risks that are freezing financial markets.

The McCain resurgence plan would be available to mortgage holders that:

:· Live in the home (primary residence only)
:· Can prove their creditworthiness at the time of the original loan (no falsifications and provided a down payment).

The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner. The direct cost of this plan would be roughly $300 billion because the purchase of mortgages would relieve homeowners of “negative equity” in some homes. Funds provided by Congress in recent financial market stabilization bill can be used for this purpose; indeed by stabilizing mortgages it will likely be possible to avoid some purposes previously assumed needed in that bill.

The plan could be implemented quickly as a result of the authorities provided in the stabilization bill, the recent housing bill, and the U.S. government’s conservatorship of Fannie Mae and Freddie Mac. It may be necessary for Congress to raise the overall borrowing limit

In other words, we’re going further down the road to socialism, at a cost of 300 billion dollars, to reward people for buying homes that they couldn’t afford.

My immediate first response, when I heard McCain’s plan was on Twitter at about 9:10 PM last night. It was, and I quote,

“OMG. McCain just suggested buying up homes and helping to pay people’s mortgages. Insane! Who came up with that nutty idea?”

…And it is a nutty idea. Just to give you an idea of how nutty, I had a typically very responsible person suggest to me semi-seriously last night, “Hey, should I buy a couple of homes really quickly and default on the mortgages? You should do the same thing! Then, we’ll just get the money right back!”

My response was that,

#1) McCain was suggesting the idea and the proposal would kill any chance he has to win, which means it probably won’t be implemented.

#2) Even if he wins, the government can’t even hand out free money right. I wouldn’t put any more faith in their ability to carry out that program than anything else they do. So, don’t risk it.

Here’s why this is such a deathblow to McCain’s campaign: McCain’s support for the bailout was a huge disappointment to conservatives and it’s why he went from being tied with Obama to roughly 6 points behind.

To make up that gap, McCain needed a game changer that would be popular, that would fire up his conservative supporters, and that would differentiate him from Obama. This proposal seems likely to fail on the first two counts and if, shockingly, the plan turned out to be popular, then Obama would just support a bigger plan.

Republicans can’t compete with Democrats when it comes to handing out taxpayer goodies. It’s always a sucker’s game to even try. Why? Because conservatives hate the giveaways and liberals are always willing to offer more.

Additionally, by supporting this socialistic plan, McCain is doubling down on the same mistake that killed him during the bailout: he’s proving definitively that he’s not really a fiscal conservative. Since that has been his primary selling point to conservatives who don’t agree with him on a host of other issues, it’s a critical mistake. In fact, if John McCain were trying to deliberately lose the election, he couldn’t have done much better than this idea.

You know, I am going to vote for McCain and I would encourage you to vote for McCain, too, but the campaign has just gone off the rails since the mortgage crisis hit the news. Even if most conservatives were inclined to do it, there just ain’t enough happy talk on earth to fix the horrific mistakes the McCain campaign has been making over the last few weeks.

PS: Whether the money for this scheme would be part of the Paulson plan is iffy. The McCain camp notes that the Paulson funds “can be” used for that purpose,

“Funds provided by Congress in recent financial market stabilization bill can be used for this purpose; indeed by stabilizing mortgages it will likely be possible to avoid some purposes previously assumed needed in that bill.”

However, when they note that, “It may be necessary for Congress to raise the overall borrowing limit,” it implies this will be over and above the money that has already been allocated.

In any case, however you slice it, it’s raw socialism and rewarding bad behavior to the tune of 300 billion dollars.