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McCain's Mortgage Bailout: More Expensive Than Congress's

October 8, 2008 - by Donny Shaw

Last night during the presidential debate, Sen. John McCain (R-AZ) proposed a new foreclosure prevention plan that is very similar to a plan that was approved by Congress and signed into law earlier this summer. Both plans call for the government to spend up to $300 billion in taxpayer money to buy up mortgages from homeowners facing foreclosure in order to give them new, FHA-backed loans with fixed rates that they can afford. But there is at least one major difference between the plans.

Under Congress’s plan, mortgage lenders would pay for the difference between the original loan and the new, cheaper FHA loan, while under the McCain plan, that difference would be payed for by taxpayers.

Congress’s plan was passed as part of the Fannie Mae and Freddie Mac bailout bill, and it just took effect on October 1st, so there is no way to measure its success yet. The basic concept behind the bill is to provide a framework for mortgage lenders and homeowners facing foreclosure to reach an agreement that is preferable to foreclosure for both parties. In order to participate in the program, mortgage lenders would have to accept a substantial write-down of principal. Once an agreement is reached, they would receive a “short payment” from the proceeds of the new government loan. Homeowners who participate in the program would agree to share any future home appreciation with the government.

Details on the McCain plan, which he is calling the “American Homeownership Resurgence Plan,” are still sketchy at this point. His website states that the plan “would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages.” By purchasing directly instead of negotiating a deal, the government would agree to pay off the original, full price of the mortgage.

Additionally, McCain’s plan does not require homeowners to share any of the profit they might make off the program if their home value increases beyond their cheaper, government mortgage.

It’s unclear how much either of these plans will end up costing taxpayers. WIth both plans, costs will result if homeowners who get into the new government mortgages end up being unable to pay for those as well. If that does not happen – if every person who gets a government mortgage pays it back in full – the government will break even with the McCain plan and actually make some profit under Congress’s plan.

But McCain’s plan would likely help more homeowners keep their homes than Congress’s plan. Since Congress’s plan requires all parties involved (mortgage lender, homeowner, government) to reach a compromise agreement, it has been estimated that it will only help about 500,000 people. There is no estimate available at this time for the McCain plan, but , since it’s simply a full-price government buyout, it should be able to attract more participants.

In case you’re curious, here’s what the Obama camp had to say today about McCain’s new mortgage plan:

>"Last night . . . [Senator McCain] threw out a proposal that appeared to give the Treasury authority it already has to re-structure troubled mortgages. But now that he’s finally released the details of his plan, it turns out it’s even more costly and out-of-touch than we ever imagined. John McCain wants the government to massively overpay for mortgages in a plan that would guarantee taxpayers lose money, and put them at risk of losing even more if home values don’t recover."

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