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Thursday, April 10, 2008

McCain's Nebulous Mortgage Proposal (UPDATED)

Initially, John McCain showed the sort of political courage that I expected from him regarding the mortgage crisis. Initially, he stated that he would not bail out anyone or anything, borrowers or lenders included. McCain's position was essentially like mine. The mortgage crisis happened as a result of a speculative market and only the free market could fix the excesses. Of course, he was immediately attacked by each of the Democrats who themselves wanted to give relief to all sorts of borrowers. Just today, McCain caved a bit and wound up with a proposal that is frankly now no better than either of his rivals. Here are the important highlights...

McCain sketched out a plan Thursday to help 200,000 to 400,000 homeowners trade burdensome mortgages for manageable loans in a speech in Brooklyn. Aides said the plan could cost from $3 billion to $10 billion.

Still missing were details on exactly who would be eligible for help; McCain said he wants to aid those who borrowed sensibly but now can't handle their mortgages.


Unlike the Democrats, McCain would have individual borrowers apply to have their mortgages refinanced. Democrats would have the mortgage-holders apply for refinancing, which Holtz-Eakin said could leave taxpayers on the hook for risky loans that lenders want to unload.

_And unlike Bush, McCain would let people have more equity in their homes; Bush would allow as little as 3 percent, while McCain would allow 10 percent, Holtz-Eakin said.

_McCain's plan would benefit the government as well as the original lender by giving them certificates for part of the loan's original value. If the homeowner sold for more, he or she would benefit along with the government and the original lender.

The problem is very simple. While it sounds good that we want to help those that borrowed sensibly but are now in trouble, how can we determine if someone borrowed sensibly. The reality that no one wants to admit is that there is almost no scenario in which someone can't pay their mortgage back if they borrowed sensibly. If borrowers were in fact defrauded, then there is already a mechanism for relief. They can already sue for fraud and the remedy includes entirely wiping away their mortgage.

Beyond that, if someone can't pay their mortgage back they simply didn't borrow sensibly. If they could pay their mortgage back but then their ADJUSTABLE Rate Mortgage ADJUSTED and now they can't, well they really didn't borrow sensibly did they. If someone either didn't realize what their mortgage terms were or did and didn't account for them, how did they borrow sensibly. If they simply borrowed too much and never could pay their mortgage back, they certainly didn't borrow sensibly. Even if they faced hardship like a lost job or sickness or what not, they really still didn't borrow sensibly. The rule of thumb is to always have a minimum of six months salary in the bank exactly for those situations.

The other major problem is McCain is proposing a rather large increase in the size of federal government. If borrowers are supposed to apply for loans directly from the government, then a new bureaucracy needs to be created. If McCain is planning on shrinking government he is off to the wrong start.

Finally, I get back to the fact that all of these proposals totally disregard the mortgage broker, the realtor, the title companies and bank employees. If you work in real estate then you are struggling just as much as any homeowner and yet no one is willing to give you any relief. That's because unlike the homeowner those that do real estate for a living have no sympathy. Apparently if you counted on mortgages for your livlihood then the federal government doesn't care at all about you. In fact, there is no reason for the government to bailout employees of the industry, however the same is true of the homeowners. The only difference is one group has sympathy and the others don't.

UPDATE: Since this was written, McCain has since come up with another mortgage proposal in the second presidential debate. Here is the full analysis of that.

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