McCain's Plan to Buy Troubled Mortgages

[jsteele]

What do people think about the plan announced during the debate by Senator McCain for the government to purchase bad mortgages?

http://www.politico.com/news/stories/1008/14377.html

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).

McCain says the plan would cost $300 billion. The home owners would be provided a new fixed-rate mortgage for the current value of the home.

In principle, I support the idea of keeping home owners in their homes rather than foreclosing on them. Foreclosing not only puts a family out on the street, but it depresses the surrounding home values and has other negative effects on the neighborhood. On the other hand, this does seem to be a case of rewarding those who made poor decisions at the expense of those who were responsible.

Just to illustrate that last point. Imagine person x and person y. Both have finances allowing for a $400,000 home purchase. In a tight housing market, person x chooses a $400,000 house which is smaller, in a less attractive neighborhood, and in a worse school district, than person x really desired. Person y purchases a $600,000 house that is bigger, in a better neighborhood, with better schools. But now, person y is in default because of an unaffordable mortgage while person x has made every payment. Both homeowners have seen the value of their homes drop. So, McCain would purchase person y's mortgage and replace it with an affordable mortgage valued at -- let's say -- $400,000. So, person y has now been rewarded for his irresponsibility. Person x, on the other hand, now has a home that is valued less than the $400,000 original price (remember, its smaller, etc than person x's now $400,000 home), so any attempt to sell would leave him underwater. Worse yet, imagine that in a recovered housing market, both homes subsequently appreciate. Person x's house returns to its original $400,000 value and person y's home now is worth $500,000. Person y can sell and clear $100,000 on his original irresponsible purchase -- all thanks to Senator McCain. Does this sound fair?

[Anonymous]

i think i heard that if they got the new lower valued mortgage, at the time of settlement they would owe 50% of then appreciated value back to the govt....? so - they didn't get to keep it all.

[Anonymous]

Anonymous wrote:i think i heard that if they got the new lower valued mortgage, at the time of settlement they would owe 50% of then appreciated value back to the govt....? so - they didn't get to keep it all.

We live fairly frugally for our income. What appreciated value would exist if they bought within the last few years? For DCUM purposes I can only see appreciated value if they bought a dump in an area like Wesley heights and had sweat equity and acted as their own general contractor hiring specific trades.

It seems like the plan should work well for an individual who bought 10 plus years ago in a good location , then refinanced irresponsibly. I don't like providing public housing except for those with extreme needs. Reminds me of the Montgmery County failed plan to use a large home in Bethesda as public housing.

[jsteele]

Anonymous wrote:i think i heard that if they got the new lower valued mortgage, at the time of settlement they would owe 50% of then appreciated value back to the govt....? so - they didn't get to keep it all.

I hadn't heard this. While it would make things somewhat better, I think the only fair thing would be for them to owe 100% of any capital gains up to the original mortgage value. In my earlier example where a $600,000 mortgage is redone as a $400,000 mortgage, and the home appreciated to $500,000, taxpayers would have paid $200,000 minus $50,000 or $150,000. The irresponsible home buyer would still walk away with $50,000.

[Anonymous]

jsteele wrote:

Anonymous wrote:i think i heard that if they got the new lower valued mortgage, at the time of settlement they would owe 50% of then appreciated value back to the govt....? so - they didn't get to keep it all.

I hadn't heard this. While it would make things somewhat better, I think the only fair thing would be for them to owe 100% of any capital gains up to the original mortgage value. In my earlier example where a $600,000 mortgage is redone as a $400,000 mortgage, and the home appreciated to $500,000, taxpayers would have paid $200,000 minus $50,000 or $150,000. The irresponsible home buyer would still walk away with $50,000.

I read something similar in a Post op ed peice, maybe this is where the PP is referencing. In it, 100% of the gain on the sale of the re-mortgaged house would go to the USG, until the difference was satisfied. If it sells for less than the difference, the new owner would also be indebted against the lien, and when they sell, that peice of the gains would go to the USG until the balance is met.

While this seems more equitable to the taxpayers, it still does not pass the sniff test for this homeowner who is exactly like your buyer x. We bought a small home in a good neighborhood, much smaller than we could have qualified for *because* we were uneasy about an impending collapse of the run up on prices. We felt we could reduce our exposure to massive percentage drops by only committing $450K to the mix. Now our home is worth maybe $400? We've never missed a payment. Why? Because we didn't exceed our means. We made a decision to live in a smaller home that we could afford on one income.

My SIL and her boyfriend bought a home in another state that would cost >$750K here. Neither produced any financial creditworthiness, nor do they have it. Their mortgage is about $350K, and they are flirting dangerously close to foreclosure unless they get higher paying jobs, FAST. In Michigan, that's not very likely. Now, in-law or not, tell me how it's fair that their bigger home which they bought irresponsibly should be refi-d down to say, $250K and yet my loan won't be refi-d?

The only way I'd support this refinancing plan is if ALL homeowners who bought since 9/11 (or whenever this run up started) are eligible to have their mortgages refinanced to today's market value, regardless of their payment status to date. And you know what, that's STILL not fair to the renters, the business owners, those who paid cash for their home (God bless 'em), etc. I don't know what the answer is, but NONE of us can afford the 25% decline in property value. Why bail out the foolhardy, who will in all likelihood, only repeat their squanderous mistakes of the past anyway?

[Anonymous]

jsteele wrote:

http://www.politico.com/news/stories/1008/14377.html

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).

McCain says the plan would cost $300 billion. The home owners would be provided a new fixed-rate mortgage for the current value of the home.

I have a question. Has the family's financial circumstances changed dramatically, hence unable to make their mortgage? Or has their teaser rate gone away and converted at a high interest rate?

Couldn't the govt. sponsor a refinancing to say 40 years at a reasonable 5% and call it a day? Why let them off the hook for the amount they borrowed?

As a homeowner who purchase their first home in 1983 and was thrilled to get a 13.9% rate when friends were paying 17%, I don't have a lot of sympathy honestly. Rates are historically low. The only thing I can think of is that perhaps the homeowner's current financial situation has declined, making them a 'high risk' that causes commercial lenders to tack a risk premium on to the interest rate?

Trying to get my arms around the logic here and having trouble.

I am all for proposed plans - it put things out on the table for discussion, revision, maybe adoption, maybe scrapping. Collaborative thinking generally yields a better solution. We need to do more of that, IMO. Barack, what is yours?

[jsteele]

Anonymous wrote:
I have a question. Has the family's financial circumstances changed dramatically, hence unable to make their mortgage? Or has their teaser rate gone away and converted at a high interest rate?

If you are speaking of my hypothetical example, I didn't provide a reason. In the real world, I'm sure there are any number of different reasons that someone could fall behind on their mortgage. As far as I know, McCain's plan doesn't distinguish between them.

Anonymous wrote:
Couldn't the govt. sponsor a refinancing to say 40 years at a reasonable 5% and call it a day? Why let them off the hook for the amount they borrowed?

As a homeowner who purchase their first home in 1983 and was thrilled to get a 13.9% rate when friends were paying 17%, I don't have a lot of sympathy honestly. Rates are historically low. The only thing I can think of is that perhaps the homeowner's current financial situation has declined, making them a 'high risk' that causes commercial lenders to tack a risk premium on to the interest rate?

Trying to get my arms around the logic here and having trouble.

I was actually thinking along the same lines as you in that a better solution might be refinancing to a longer loan. That would allow owners to make payments, but it would preclude them from selling because they would still be underwater.

Anonymous wrote:
I am all for proposed plans - it put things out on the table for discussion, revision, maybe adoption, maybe scrapping. Collaborative thinking generally yields a better solution. We need to do more of that, IMO. Barack, what is yours?

As it turns out, the already passed rescue plan already has language in it allowing the government to do exactly what McCain wants. Obama apparently spoke in favor of that provision. So, until we hear further details, the McCain plan, the Obama plan, and the Paulson plan are all the same plan.

[Anonymous]

I have not had a chance to really study the proposal, but my initial gut reaction when I heard it was "yeesh ... so much for moral hazard." It sounds too unfair for those who behaved prudently, even though I acknowledge that some are hurting as a result of things other than imprudence. I agree with Jsteele that the rescue plan just passed is designed to provide assistance of this sort in a slightly less direct way ... would definitely want to know a LOT more about any policy proposals suggested by either candidate this close to a close election ... PANDER ALERT!!!

[Anonymous]

Frankly, this plan makes me a bit angry. When my husband, who is an elementary school teacher, was laid off in Cleveland, he couldn't find another job to pay enough money to pay the bills. After a year of trying to make ends meet, I accepted a transfer to this area and he found teaching work. We have been trying to sell our home for 3 years. I had to rent it out and we are making up the difference of about $500/month. We rent here and have been struggling, but at least we are both employed. It's no listed at $15k less than what we purchased it for -- we haven't had one offer. Maybe we'd be better off (under this proposal) to move back, have my husband be a SAHD and knock a few grand off our loan. What a crock.

[Anonymous]

Is that plan already part of the current bailout?

[Anonymous]

Anonymous wrote:Is that plan already part of the current bailout?

I think it's in there as an option, and I also think I read that Obama is taking credit for supporting and/or originating it. McCain seems to be guaranteeing it for everyone, rather than it being just an option. BIMBW.

[Anonymous]

Anonymous wrote:Frankly, this plan makes me a bit angry. When my husband, who is an elementary school teacher, was laid off in Cleveland, he couldn't find another job to pay enough money to pay the bills. After a year of trying to make ends meet, I accepted a transfer to this area and he found teaching work. We have been trying to sell our home for 3 years. I had to rent it out and we are making up the difference of about $500/month. We rent here and have been struggling, but at least we are both employed. It's no listed at $15k less than what we purchased it for -- we haven't had one offer. Maybe we'd be better off (under this proposal) to move back, have my husband be a SAHD and knock a few grand off our loan. What a crock.

Sorry to hear that, pp. It sucks to be in that situation!

[jsteele]

Okay, I have now learned new details of McCain's plan and, not surprisingly, it worse than I thought.

First, to correct an earlier error. I posted above that a similar plan was included in the rescue bill. That was incorrect. Rather, in a separate housing bill passed in August, Congress included authority for distressed mortgage holders to refinance into Federal Housing Authority mortgages. However, to do this, the lender had to reduce the mortgage principal and, hence, take a loss. In addition, borrowers would have to share any profits made on subsequent resale with the government.

The McCain plan does not require the principal to be reduced. So, the government would buy a distressed mortgage at its full value and replace it with a smaller mortgage, eating the difference. This lets two parties off the hook: 1) the borrower is relieved of any penalties for taking an irresponsible mortgage, and 2) the lender is relieved of any penalty for irresponsibly offering a mortgage. The penalty for both parties is nicely picked up by taxpayers, including those whose mortgage decisions were responsible.

I don't see anything here that will deter either borrowers or lenders from making similarly poor decisions in the future. The authority included in the earlier bill is a bit better. Maybe not as good as I'd like, but both the borrower and the lender get hit with a financial penalty. McCain wants to remove that entirely. I can't for the life of me figure out how "fiscal conservative" John McCain can expect tax payers to spend billions of dollars in this manner. He must really be hoping to get the irresponsible borrower and lender vote.

[Anonymous]

I can't for the life of me figure out how "fiscal conservative" John McCain can expect tax payers to spend billions of dollars in this manner. He must really be hoping to get the irresponsible borrower and lender vote.

I can't figure this out either. It completly alientates me and many like me who were on the fence about voting for him.

Reduce the interest rate, I agree---give these borrowers a long fixed (30, 40, 50 year) mortgage at 5.5%. But please, don't reduce the amount of the loan to below market value. This is just plain insulting.

[Anonymous]

Didn't the government do the same thing during the depression? They bought up homes. I think the point is to keep people in their homes. If people are foreclosed on it creates a whole new set of issues for the government and the community to deal with, namely homeless, welfare, poverty. I am not saying the plan is perfect and that people should not be angry, but the feds are looking at the larger people. And in the long run the government makes money off of these loan, thus creating revenue for the country.