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Considering McCain’s Proposal for Refinancing Bad Mortgages – By Bryan Dornan

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In the wake of this catastrophic financial melt-down, John McCain’s proposed to buy bad mortgage loans from the banks in an effort to fight off foreclosures and keep homeowners in their home.  The purchase mortgage proposal would also increase the liquidity and cash flow of these national banks and these financial institutions should be able to begin lending money again. McCain said he would utilize almost half the $700 billion from the recent Wall Street bailout package to aid American consumers immediately, rather than rescue the financial markets.  The Republican presidential candidate announced in the televised debate he would order the federal government to use $300 billion of specified treasury funds to buy the delinquent mortgages while enabling the struggling homeowners to retain their homes. 

Last month, Democratic nominee Barack Obama spoke of a similar plan, when he proposed that the U.S. government take great steps to help homeowners who were fighting to make their mortgage payment each month. McCain’s home loan plan was far more detailed.  “I would order the secretary of the Treasury to immediately buy up the bad home-loan mortgages in America and renegotiate at the new value of those homes — at the diminished values of those homes — and let people be able to make those payments and stay in their homes,” he said.  McCain called this loan modification proposal the “American Homeownership Resurgence Plan.”  Clearly the struggling economy has played a significant role in helping Obama pull ahead of McCain nationally and in critical battleground states as well.

Recent reports indicate that Americans have reacted negatively with great concern regarding the $700 billion rescue for the major U.S. banking institutions.  The fact that many Republicans voted against the mortgage bailout package did not stop McCain from going against the grain with his purchase mortgage bailout.  Most Republicans objected to the bailout bill’s size and to the basic belief that government intervention in the free market economy would be damaging. McCain’s plan for mortgage refinancing and loan modifying would be committing a much greater role for government and potentially the American taxpayers could take an even greater financial loss.  McCain continued, “It’s my proposal,” McCain said. “It’s not Sen. Obama’s proposal. It’s not President Bush’s proposal.”  As conceived by Treasury Secretary Henry Paulson and as passed by Congress, the rescue package would be used primarily to purchase mortgage-backed securities. It would allow, but not require direct purchase of mortgages. Under McCain’s plan, the Treasury would be required to modify mortgage loans directly with homeowners whose homes were experiencing declining values.

Economic adviser Douglas Holtz-Eakin remarked that the mortgage refinancing plan projected mortgages in “the low 5 percent” range that should help the sinking property values across the nation. 30-year mortgage interest rates remain relatively low between 5.75 and 6%.  It was unclear — either from McCain’s remarks or from the backup materials provided by the campaign — how such a massive plan would be administered.  Eakin also said the plan would help stabilize the plunging values of mortgage-backed securities that have been at the heart of the crisis in the financial markets.  “Sen. McCain believes this is exactly the right kind of policy,” Holtz-Eakin said. “Provide direct help to homeowners; at the same time, support the financial markets and keep them from further damaging the availability of credit to Main Street America, one of the — the real threats to the economy at this point in time.” 

McCain’s plan is bold and risky, but Roosevelt took similar action to end the great depression by purchasing homes from failed banks and those rescuing transactions helped banks find liquidity and helped homeowners keep their homes.  The American economy recovered and the era was marked as the “Great Depression.”  I will commend McCain for taking the first steps at proposing a solution to the mortgage and housing crisis.  Simply handing banks more money will not solve the mortgage crisis.  The fact that McCain proposes that “mortgage loans” will be restructured using the current value” signifies that he at least understands some the roots to this problem.  Most politicians love to blame the mortgage crisis on corporate greed and predatory lending, but the reality is that we had a housing bubble predicated on low interest rates and loose mortgage underwriting.  McCain’s plan is probably not the safest plan for America, but it’s likely not too far away from a solution to this mortgage mess.

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4 Comments

1

[…] Considering McCain’s Mortgage Refinancing Proposal – By Bryan Dornan […]

2

We are seeing a huge increase in loan modifications as we continue to restructure liens from Bof A, WAMU, Chase and Suntrust. It is crazy how many borrowers are 60 or 90 days behind on their mortgage.

3

It seems like Obama is getting elected and this worries me because he has not specifically addressed the mortgage crisis. He talks about predatory lending and the mortgage crisis but no details how he would help homeowners salvage their homes out of this foreclosure mess. Do you have any more details on Obama’s mortgage rescue plan?

4

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