Thursday, October 9, 2008

Taxpayers, Not Lenders, Would Bear Costs of McCain’s Mortgage Proposal

WASHINGTON — The homeowner assistance plan that Senator John McCain announced without detail in the presidential debate Tuesday night would allow millions of financially stretched Americans to refinance their mortgages with government help, but it would leave taxpayers to cover the losses, rather than the financial institutions that hold the original mortgages.

Mr. McCain said in the debate that the program would be expensive, and on Wednesday his chief economic adviser, Douglas Holtz-Eakin, acknowledged that the liability would be borne directly by taxpayers.

Mr. McCain, who has made cutting government spending a centerpiece of his campaign, justified the costs on Tuesday night by saying that “until we stabilize home values in America, we’re never going to start turning around and creating jobs and fixing our economy.”

As Mr. Holtz-Eakin described it, the proposal would ensure that homeowners got direct and speedier help to stay in their residences before they faced foreclosure, so that Wall Street and financial institutions would not be the only direct beneficiaries of government aid. The new loans would be 30-year mortgages at fixed interest rates of just over 5 percent, he said. The McCain campaign did not make clear what level of financial strain an applicant would have to show to qualify for the program.

The campaign of Mr. McCain’s Democratic rival, Senator Barack Obama, who had previously signaled support for similar approaches, condemned the proposal Wednesday. It said in a statement, “The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud.”

Beyond the costs, the proposal could encounter a backlash from voters, especially those who have had to work hard and sacrifice to keep current on their mortgage payments and who might resent bailing out fellow homeowners who got themselves into financial trouble.

Mr. Holtz-Eakin suggested that “the taxpayers’ contribution” would be the price of getting the quickest possible relief to homeowners and arresting falling home values. Declining home values have led to rising defaults and foreclosures, which in turn have devalued trillions of dollars in housing-related assets for financial institutions and companies in the United States and abroad, threatening the businesses’ survival and fueling a credit freeze that endangers the global economy.

Though Mr. Holtz-Eakin spoke of the urgency for action, he said Mr. McCain did not propose the idea as part of the recent bailout negotiations between Congress and the White House. So it would not begin until after Mr. McCain, if elected, takes office in January and issues an executive order.

The White House and the Treasury Department declined to comment on the McCain proposal, saying they did not have enough information. But they said existing programs were helping homeowners to avert foreclosures.

Mr. Holtz-Eakin noted that about 10 million Americans had mortgages that exceeded their homes’ value. “Literally millions of people” could benefit, he said, adding, “The question is how many people pick up the phone.”

He said the process of applying for a replacement mortgage would be “very simple,” though clearly administering such a program would not be. Under the plan, homeowners could call a mortgage broker or lender to refinance their residences. If they passed a credit check, they would qualify for a Federal Housing Administration loan based on the reduced value of the homes, with lower principal and a lower interest rate.

The government would pay off the original loan, Mr. Holtz-Eakin said. That would take the bad debt off the books of the institutions that made the original loans, or in the case of loans that were sold and repackaged as mortgage-backed securities, it would prevent further deterioration of their value.

Assuming the homeowners ultimately paid off the new mortgages, the taxpayers’ liability would be the difference between those mortgages and the original, more costly mortgages, Mr. Holtz-Eakin said.

Mr. Holtz-Eakin corrected one detail from the brief outline that the campaign issued Tuesday night after the debate. That outline said the plan would cost roughly $300 billion, which, it said, could be drawn from the $700 billion provided in the financial rescue package that became law last week.

But Mr. Holtz-Eakin said the financing could come from “several pots of money”: the bailout money, the F.H.A.’s separate authority to refinance up to $300 billion in mortgages, or the mortgage-finance companies Fannie Mae and Freddie Mac, which the government now owns.

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