Ordering the government to buy up bad mortgages to cut homeowners' monthly payments might sound good, but experts are skeptical. They say the plan John McCain is promoting is unlikely to solve the housing crisis that's pushing the economy toward recession.
One big problem: The vast majority of the toxic home loans that are clogging financial markets and freezing up credit have been sliced, diced and repackaged into complex investments that the government would be hard-pressed to unravel and buy.
Even if the government did gain access to the mortgages, it would have to pay far more than they would ever be worth, housing specialists said Wednesday. That would effectively bail out banks and lenders with taxpayer money to a greater degree than Congress and the Bush administration are already doing through the $700 billion financial industry rescue enacted last week.
"The mortgages that are causing this credit freeze are generally mortgages that aren't available for purchase," said Alan M. White, Valparaiso University specialist in consumer law.
"It's not quite as easy as the McCain campaign thinks it is," said Andrew Jakabovics of the Center for American Progress.
Republican McCain is pushing his American Homeownership Resurgence Plan as he works to burnish his credentials on the economy, an issue that has helped Democratic rival Barack Obama pull ahead in the presidential race as the national financial crisis has worsened.
With foreclosures on the rise — particularly in election battleground states like Indiana, Florida, Michigan and Ohio — and many Americans seething about the huge rescue package for financial institutions, McCain argues his plan would provide direct help to struggling homeowners.
He declared in Tuesday night's debate that he would order his Treasury secretary to buy up bad mortgages and let struggling homeowners refinance into more affordable loans — a power the government already has under the new financial industry bailout law.
Under McCain's plan, the government would spend $300 billion to purchase distressed loans and provide new, fixed-rate mortgages. Douglas Holtz-Eakin, the Arizona senator's economic adviser, said the plan would help stabilize the plunging values of mortgage-backed securities that are at the heart of the crisis in the financial markets.
To do so, the government would pay the full face-value of the distressed mortgages, Holtz-Eakin said.
Under that scenario, the government could buy a $200,000 subprime mortgage on a home now worth just $100,000, give the homeowner a 30-year, $90,000 loan with a 5 percent interest rate, and essentially eat the $110,000 difference.
"It's the only way to do it in a timely fashion," Holtz-Eakin said.
Obama's campaign said right after the debate that he had made similar proposals to McCain's and there was nothing new in the Republican's remarks. But as McCain aides offered more details on Wednesday, the Obama camp changed its tune.
The plan would cause 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," said Obama economic adviser Jason Furman. "The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud."
Indeed, analysts on the right and left said the plan would let banks and investors who bet heavily on the risky mortgages walk away with a handsome payout courtesy of U.S. taxpayers.
"You run into the question of whether or not then you are bailing out bad lending decisions," said David C. John of the conservative Heritage Foundation.
The housing rescue enacted in July allows the government to insure up to $300 billion in new, fixed-rate loans to let homeowners at risk of foreclosure trade in their mortgages for ones they can better afford — but only if their banks agree to take a loss on the original loan.
"What they were trying to do was to spread the pain of the reduction to the lender," John said. "If you pay off 100 cents on the dollar on these loans, then that pain goes to the taxpayer."
McCain's proposal is similar in some ways to a plan that has been advocated by the liberal Center for American Progress starting last December, but its ideological precursor is the Depression-era Home Owners' Loan Corporation, which traded bonds for defaulted mortgages with lenders and investors at a discount and reworked the loan terms to help borrowers.
The problem, say economists and housing analysts, is that times have changed considerably since the 1930s, and many mortgages are now bound up in the labyrinthine investments that have brought financial institutions to their knees.
Legal contracts with investors — known as pooling and servicing agreements — limit the ability to alter loans or take them out of the pool.
"You can't just go to Countrywide and say, 'Please sell us 100 mortgages out of your securitized pool,'" White said. The contract "specifically tells them they can't do that."
Deutsche Bank estimates that more than 80 percent of the $1.8 trillion in outstanding troubled loans — those made to "subprime" borrowers with weak credit and "Alt-A" borrowers who didn't document their incomes or provide large down payments — are tied up in mortgage-backed securities.
The remaining 20 percent, about $318 billion according to Deutsche Bank, are "whole loans," easier to modify because they don't have multiple investors.
The bailout package already directs the Treasury secretary to renegotiate whole mortgages it acquires from troubled financial companies, and to use its leverage to rework loans that are part of larger investment pools.
Treasury Secretary Henry Paulson said Wednesday that under the new program and the earlier housing rescue "we're going to be working to avoid foreclosures."
Helping homeowners whose mortgages are pooled into larger investments is tougher.
"The problem is these things are not transparent. It's not at all clear who holds which pieces and where they've gone," Jakabovics said.
His organization has proposed changing the law to encourage mortgage holders to allow refinances like those envisioned under McCain's plan, including by denying tax-advantaged status to investments that block such changes.