To the People

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or TO THE PEOPLE.

Wednesday, October 08, 2008

Mortgage Meltdown Update: What's Another $300 Billion?

Somehow while drunkblogging the debate, TtP managed to miss the one big piece of news that came out of it: McCain has proposed his own $300 billion housing plan. That's on top of the the $700 billion that Congress agreed to last week. The Wall Street Journal has the details:
McCain’s mortgage plan would have Treasury buy up $300 billion in actual mortgages. It differs from the Frank-Dodd plan by using Treasury as a direct financing source–a solution that is more plausible today because Treasury has already become a direct financing source for mortgage giants Fannie Mae and Freddie Mac, has loaned $85 billion to American International Group, and is providing a credit line to the Federal Deposit Insurance Corp.

The $700 billion bailout, or troubled assets relief program, dubbed as TARP, would buy only the mortgage securities that are weighing down the banks, not mortgages themselves. The problem, as McCain proponents see it, is that this doesn’t stem the tide of homeowners defaulting on their mortgages. When homeowners default, the value of the mortgage-backed securities keeps falling, which makes them riskier to the banks and even harder to sell. In essence, the McCain proponents believe in helping the problem at its source.
The problem with this plan is that it really is a bailout. The federal government would be using taxpayer dollars to refinance these mortgages. At least in the Paulson-Bernanke plan we are buying the securities and then reselling them. We'll get some of the money back. McCain's plan directly rewards people who took out mortgages they could not afford. Then again, the WSJ story indicates it may be the best solution. So we're screwed.

UPDATE: As the Politico reports, McCain has made a subtle but important change to the plan that makes it considerably more expensive:
When McCain sprang his surprise idea at the start of the debate in Nashville, his campaign posted details online of his American Homeownership Resurgence Plan, which would direct the government to buy up bad home mortgages, allowing strapped people to keep their property.

The document posted and e-mailed by the McCain campaign on Tuesday night says at the end of its first full paragraph: “Lenders in these cases must recognize the loss that they’ve already suffered.”

So the government would buy the mortgages at a discounted rate, reflecting the declining value of the mortgage paper.

But when McCain reissued the document on Wednesday, that sentence was missing, to the dismay of many conservatives.

That would mean the U.S. would pay face value for the troubled documents.

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