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Saturday, April 26, 2008

McCain "Clarifies" Sensibly Borrowed

Recently, I criticized John McCain's mortgage proposal because I felt his term "borrowed sensibly" was nebulous. I recently had an opportunity to participate on a blogger's conference call. I wanted to ask him this question however the call ran out of time before I got my opportunity. I was able to submit my question and here is the response from the campaign...

Eligibility: Holders of a sub-prime mortgage taken after 2005 who live in their home (primary residence only); can prove creditworthiness at the time of the original loan; are either delinquent, in arrears on payments, facing a reset or otherwise demonstrate that they will be unable to continue to meet their mortgage obligations; and can meet the terms of a new 30 year fixed-rate mortgage on the existing home.

Now, while this specifies which borrowers will get help, this certainly doesn't conform to my definition of borrowing sensibly. In other words, this is any subprime borrower (2005 and later) that could make their mortgage payment once but can't anymore. No reason needs to be given besides personal current financial hardship. I believe that this phrase

can prove creditworthiness at the time of the original loan;

means only borrowers with full doc loans, however this is a bailout in wool's clothing. I suppose it makes some sense to exclude borrowers that made up their income (so called stated loans), however that will also limit who will be helped to a tiny minority of those that need help. Furthermore, just because you could prove your income initially, that doesn't mean you borrowed sensibly. Most of the folks now in trouble that could prove their income likely qualified at the edges of any loan program. Many banks extended debt to income levels to 55% and even 60% and many of these borrowers likely only qualified using those loans. Now, that overextension is coming back at them, and McCain wants to reward this lack of financial restraint with a bailout.

McCain has gone from recognizing that the mortgage crisis was created by a speculative market and thus saying that only the market can fix it to a bailout. McCain can spruce up the language all he wants, however he is willing to give people loans they could never get on their own as long as they fit a time frame and can't make their current payment or won't once their payment resets.

Unfortunately, McCain's plan is the definition of a moral hazard. Borrowers don't just somehow wind up not being able to afford their mortgage. This happens as a result of poor financial management. Yet, McCain will reward these borrowers with new loans, and he will make them fixed rates no less. Most of these folks took on the risk of an ADJUSTABLE rate mortgage, and now that is biting them. Rather than paying the added price of taking on more financial risk, these same borrowers will be bailed out.

Unfortunately, in my opinion, McCain has gone from looking at the crisis sensibly and with courage to having a plan no less disastrous than any other politician. It is now clear between Congress, the Democratic Presidential candidates, and McCain that the only thing more scary than the crisis itself is what the government will do in response to it.

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