The Catch In McCain's Non-HOLC Plan

Ah, I should have known there would be a catch in McCain's endorsement of HOLC and Brad DeLong spots it:

[McCain advisor] Douglas Holtz-Eakin says, this morning:

[W]e would in fact be taking the negative equity position and putting it on the taxpayers books instead of putting it on the private lenders books [BTD's emphasis] or the homeowners books. We think the balance of risk has shifted to the point where this is the way to go...

What does this mean? It means that John McCain wants to give $100 billion of taxpayers' money to America's worst-behaving mortgage financiers.

So McCain's idea is to give money to the mortgage lenders, not help the homeowners. No way, no how, no more corporate giveaways McCain. HOLC is this - the government buys the loan at market value, the mortgage lender takes its hit and the homeowner keeps his/her house on new affordable credit terms. That is HOLC. McCain's plan is nonsense.

By Big Tent Democrat, speaking for me only

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    Which is why Obama is apparently (5.00 / 1) (#1)
    by andgarden on Wed Oct 08, 2008 at 03:17:18 PM EST
    Obama's right (5.00 / 3) (#4)
    by Big Tent Democrat on Wed Oct 08, 2008 at 03:21:08 PM EST
    The Obama campaign says the reason for the opposition is that when the McCain campaign revealed details of the plan Wednesday, it became clear that taxpayers would be guaranteed to lose money, and financial institutions who helped caused the problem would be beneficiaries.

    Politico's Ben Smith reported from a conference call with McCain senior adviser Doug Holtz-Eakin: "Taxpayers would directly pick up the tab for the difference in cost between a homeowner's old, too-expensive mortgage and the cheaper one provided by the government."

    The plan would be a better deal for taxpayers if the bad mortgages were bought at a discount.

    Now back to the REAL HOLC.  Obama should endorse THAT.


    Well (5.00 / 1) (#45)
    by Steve M on Wed Oct 08, 2008 at 05:19:26 PM EST
    as long as we're not actually forcing financial institutions out of business, it's certainly appropriate to ask them to bear some of the loss that otherwise would fall entirely on the taxpayer.

    If we have to pay the financial sector 100 cents on the dollar for every mortgage-backed security or else the world ends, then I guess that's what we have to do.  But unless it's absolutely necessary, that outcome is nothing but a windfall for the folks who contributed quite a bit to this mess in the first place.  I personally think they can afford to sell to the government at a little discount.


    What we are against (5.00 / 0) (#56)
    by Steve M on Wed Oct 08, 2008 at 05:39:24 PM EST
    is socializing the ENTIRE loss.

    It's all about risk management (5.00 / 1) (#67)
    by Manuel on Wed Oct 08, 2008 at 06:12:13 PM EST
    It isn't a loss until you sell it although in the meantime it drags down your net.  For many banks, taking the certain loss now is better that risking a bigger loss later despite the probablility that the net result will be a gain (particularly if we can get housing prices stabilized and the economy healthy).  The reason to move these assets to the government is that the government's balance sheet can better handle the risk as it has more resources and a longer time horizon.

    You need to keep in mind... (none / 0) (#50)
    by steviez314 on Wed Oct 08, 2008 at 05:30:54 PM EST
    the mortgage backed securities are already marked on the books of the banks at less than 100%.  Probably closer to 60-70% in many cases.

    Now the banks are deathly afraid that their next markdown will put them at 50% or less.  The gov't will probably buy those securities at the 60-70% mark.  This is what then happens:

    -the banks are just happy to be rid of them.  They don't have to take any further losses, and if they end up being worth more, that's water under the bridge.

    -the government can finance their purchases with 2% Treasuries.  they can go to the homeowners and reduce their interest rate from say 8% to 5%.

    -the gov't still makes the interest rate spread (5%-2%), and vastly improves the chances that the securities are worth 100% in the future, or at least enough to maybe sell them at 80% soon and make  a profit.

    -the banks only make out in the sense that they are rid of their problems without further loss.

    -the gov't makes money on the spread, and maybe money on the re-sale.

    -the homeowner has a better chance of keeping his home.

    At least, this is how it's supposed to work!


    Well (none / 0) (#55)
    by Steve M on Wed Oct 08, 2008 at 05:38:43 PM EST
    what strikes me is that if the banks were really happy to be rid of these securities at the price the government is willing to offer, Paulson wouldn't have had to stress so emphatically the need for sweeteners in the bill in order to encourage financial institutions to participate.  They wouldn't need any encouragement.

    I think we're basically in the same ballpark here, but I think it must be the government's intent to buy these things at a price that's somewhere in the middle.


    I'm a trader, so I know the banks' mentality (none / 0) (#57)
    by steviez314 on Wed Oct 08, 2008 at 05:42:32 PM EST
    They're thinking "how can I sell this, it'll come back, it'll be worth more the second I get rid of it, maybe I'll just hold on longer".

    The banks will need a push to get rid of this stuff.


    Or Are They Thinking... (none / 0) (#59)
    by santarita on Wed Oct 08, 2008 at 05:54:23 PM EST
    The good securities, I'm going to keep.  I have no idea what the trash securities are worth but if I had to guess, $.25 on the dollar.  I'm going to play Paulson and see if I can't get him to accept this stuff for $.80 on the dollar.

    Some banks might be happy to get rid of the toxic stuff at $.50 on the dollar.  But some banks may need to have the toxic stuff priced at .80 on the dollar.


    A race between getting the highest amount, and (none / 0) (#74)
    by Christy1947 on Wed Oct 08, 2008 at 06:43:41 PM EST
    holding the securities until you get pasted for insufficient capital because there is near zero market for them now, at mark to market, and a negotiated amount based on what the post mark to market rule turns out to be. No money to loan to good customers in the meantime.

    On the bankruptcy thing, the question for (none / 0) (#75)
    by Christy1947 on Wed Oct 08, 2008 at 06:46:50 PM EST
    me was whether he was omitting something he supports because of the number of votes needed, and the force of the bank and credit card lobby to INSIST that anyone vote against the bill if this was in it, no matter what else was in it, and therefore kill it, if this happened. When you have a big mess and limited time, sometimes you don't get all you want. If someone knows better, I am checking the posts.

    He still can (none / 0) (#6)
    by coigue on Wed Oct 08, 2008 at 03:24:13 PM EST
    maybe this Mccain plan will lead Obama that way.

    CNN seems confused and (none / 0) (#11)
    by oldpro on Wed Oct 08, 2008 at 03:35:36 PM EST
    so am I.

    An hour after you posted this, Dana Bash/CNN's crawl equated McCain's 'help homeowners plan' to Hillary Clinton's!

    My head hurts.


    If only the media wished to be as accurate (none / 0) (#36)
    by Militarytracy on Wed Oct 08, 2008 at 04:47:22 PM EST
    as they wish to be sensational :)

    the imputation of the plan to Clinton (none / 0) (#73)
    by Christy1947 on Wed Oct 08, 2008 at 06:38:56 PM EST
    was probably intentional, to make another pass at her still-supporters to see if he can lure them now. "See, Clinton proposed this. I LIKE her ideas, Hint, hint."

    The real question as to many of those mortgages is how much the present holder would be paid for them, whether it is the current near zero value for a defaulted mortgage with the obligation to protect the collateral, or the assumed shortfall between the appraised value of the property at time of issuance and the appraised value now,  or in packages where they try to say 'pay us XX% of what the original price was since some of the mortgages are good.' (Sixty five percent is the number I heard floated.

    Second question is is it coming out of the Congressionally- approved $700B, which is in part supposed to do that, or from still another hit on the now much battered Treasury.  Obviously he has not figured in how much less tax receipts will be next April given the number of newly unemployed at all income levels.


    Last night McCain (5.00 / 1) (#83)
    by litigatormom on Wed Oct 08, 2008 at 09:21:50 PM EST
    claimed the idea was all his.

    What McCain proposes to do is pick up the borrowers' deficiency so that the bank is made whole. It helps homeowners to the extent that it helps borrowers stay in their homes. But unlike the plan to buy mortgage-backed securities at a discount -- which leaves at least a possibiity that the securities will later appreciate in value and will be sold at a profit for the taxpayers -- McCain's mortgage proposal is an unconditional taxpayer giveaway.

    Now, perhaps as a policy matter its not a bad idea for the taxpayers to bail out mortgage lenders and absorb a loss if it means that homeowners can stay in their homes. But it is something that needs to be explained to taxpayers so they can evaluate the consequences, especially given the amount of money the bailout has already cost.

    The Clinton plan, as I understood it, would have required the lenders to take a hit on their books for selling their mortgages to the government at a discount to face value. Despite having to write down the assets, the banks would still benefit because they would quickly get the equivalent of current FMV of the property without a messy foreclosure procedure.


    Yea (5.00 / 1) (#3)
    by CST on Wed Oct 08, 2008 at 03:18:49 PM EST
    I started to notice this back and forth.  I wasn't sure what was true - didn't see the McCain camp response.  Glad to have that clarified.

    Props to you for pointing it out (none / 0) (#5)
    by coigue on Wed Oct 08, 2008 at 03:23:11 PM EST
    in the other thread

    Another catch, going by what I just (5.00 / 2) (#8)
    by tigercourse on Wed Oct 08, 2008 at 03:28:00 PM EST
    heard on CNBC, is that McCain's plan would not help people who took no money down mortgages, which is where over 40% of the foreclosures are coming from.

    What about the homeowners (5.00 / 1) (#61)
    by themomcat on Wed Oct 08, 2008 at 05:59:51 PM EST
    hat put no money down but were able to make payments until the rates on the Arm increased and the homeowner was not able to refinances because the property is not worth the original mortgage?

    Howerver (5.00 / 1) (#77)
    by themomcat on Wed Oct 08, 2008 at 06:57:09 PM EST
    those properties are still a problem. In the current market they cannot be sold at auction because no one has the credit, so the bank sits on them. The property becomes a blight on the neighborhood because it is empty and deteriorating thus dragging market values lower. It can't be rented by anyone because it is in the market to be sold. So what is the lesser of two evils? Allow the property to go into foreclosure and sit stagnating or renegotiate the mortgage on the current market value with the homeowner and recoup some of the loss?

    Most of those mortgages (5.00 / 2) (#62)
    by themomcat on Wed Oct 08, 2008 at 06:01:49 PM EST
    did not originate with conventional banks but with mortgage companies that were not regulated.

    If you want to spread the losses (5.00 / 3) (#9)
    by Steve M on Wed Oct 08, 2008 at 03:32:28 PM EST
    you could always take a compromise approach where the government buys the loans somewhere between book value and market value.  I mean, you want to make the banks bear some of the cost, but you don't want to drive them out of business or it defeats the point, so I could see where a middle ground might be necessary.  But this relies on knowing detailed financial information that none of us have.

    I'm not sure if folks appreciate one of the paradoxes of this bailout - the fact that, by and large, financial institutions do not want to participate in the bailout!  Instead, they want to get away with being free riders on someone else's participation.  People joke about Paulson's plan being socialism, but it's actually passive-aggressive free market stuff in my book.  What you need to do in a crisis is tell these financial institutions that we are going to take stuff from them for the common good, to coin a phrase.  Otherwise we all sink together.

    Concrete example: let's assume a bunch of banks hold a bunch of impaired mortgage-backed securities.  Based on the actual value of the underlying mortgages, these securities ought to be worth 70 cents on the dollar.  But because the market is frozen up and no one wants to trade this stuff, the only way the banks can unload it is at a fire-sale price of 30 cents on the dollar.  (Thus, if mark-to-market rules apply, the banks have to value all the securities at 30 cents for balance-sheet purposes, meaning suddenly they're undercapitalized and may fail.)

    So let's assume the government comes along and says hey, we'll give you 50 cents on the dollar for those securities.  Sounds like a great deal, right, because it's a lot better than the 30 cents they could get from any other buyer.  But the banks get greedy and start thinking, "Hey, if the government buys up a lot of these securities from other folks and gets the market going again, we can do better than 50 cents on the dollar.  Once the market is liquid we ought to be able to get the full 70 cents we deserve based on the underlying value of the securities."  So as a result, no one wants to participate in the Treasury program and sell their securities for 50 cents.  They all want someone ELSE to do it so they can sell their securities for even more down the road!

    And the point I'm making is that Treasury needs to be able to tell these banks, "Listen, for everyone's sake, you're going to sell us this stuff or else."  If all they can do is "yoo hoo, we're offering 50 cents on the dollar, anyone want it?" then we're unlikely to get very far.

    This sort of market (none / 0) (#12)
    by coigue on Wed Oct 08, 2008 at 03:36:18 PM EST
    manipulation seems to happen lots, and big businesses are masters at making it work for them. I agree with you that some mandate for participation is a good idea.

    If the 70% valuation. . . (none / 0) (#13)
    by LarryInNYC on Wed Oct 08, 2008 at 03:37:43 PM EST
    you discuss in your comment is supportable, I'd have no trouble buying the securities as some relatively small discount on that figure.  Because the government intends to hold the mortgages, "profiting" from the interest received (which, I assume, is the basis for the "true valuation" of the securities) , I don't see why they need to get them at the fire sale caused by the current illiquidity crisis.

    Am I grossly wrong somewhere?


    Sounds good to me (none / 0) (#15)
    by andgarden on Wed Oct 08, 2008 at 03:38:50 PM EST
    We don't want to destroy the banks in the process of helping home owners.

    We neither want to destroy them. . . (5.00 / 1) (#17)
    by LarryInNYC on Wed Oct 08, 2008 at 03:40:24 PM EST
    nor make them whole.  Figuring out how to make it hurt enough while not cutting off our own noses would be a definite case of threading the needle.

    Indeed (none / 0) (#20)
    by andgarden on Wed Oct 08, 2008 at 03:42:15 PM EST
    Issues like this one explain why nationalizing the banks might not be such a terrible option. Except, there's no way that's happening.

    It is what the Brits are doing (none / 0) (#84)
    by litigatormom on Wed Oct 08, 2008 at 09:28:37 PM EST
    and the Irish.  Selling the government a meaningful equity stake in the banks creates liquidity for the banks but doesn't hobble the taxpayers with bad assets they can't sell. True, there is no guaranted upside -- equity can get wiped out -- but if the banks recover, the value of the taxpayers stake increases over the long term and can be sold in a manner that doesn't send the stock price tumbling back down.

    Well (none / 0) (#18)
    by Steve M on Wed Oct 08, 2008 at 03:41:32 PM EST
    I doubt the actual spread is anything like 30 vs. 70 cents, but setting that aside, I agree that the transaction doesn't necessarily have to be at a deep discount.  The fundamental question - which there isn't really an answer to, as Paulson has the discretion to resolve this on a case-by-case basis - is whether the government plans to buy this stuff up and then hold it for a while, or whether the idea is simply to act as a market-maker and find someone else to sell it to as soon as possible.

    There's no particular plan. .. (5.00 / 2) (#23)
    by LarryInNYC on Wed Oct 08, 2008 at 03:45:43 PM EST
    under actual consideration, but I think the one we all like (as per BTD) is the Clinton formulation.  I believe she is modeling it on the New Deal original which, if I correctly recall, had a life of twenty years or so.  It bought up mortgages and held on to them like some kind of old-fashioned Bailey Savings & Loan.

    Spread depends on geography (none / 0) (#34)
    by wurman on Wed Oct 08, 2008 at 04:40:03 PM EST
    There are regions/areas where 80 cents on the dollar will work, others it may be 50 cents, a few where even 30 cents on the buck is too high a valuation.

    There are experts in this arcane stuff.  However, I don't think they work for banks & they certainly don't work for the federal gov't at any level in any agency.

    Mark-to-market for assets may have been the original problem & none of the phonies who pedaled that plan want to "own" it.  Some of this goes back to sound accounting practices being altered, for political reasons, & an insatiable desire by the IRS to force re-evaluations of assets that had been carried on the books for decades at their initial purchase prices.

    F'rinstance: every moderately informed person in the USA knows that they can borrow $30,000 to buy a new car, drive it around the block, try to trade it in, & find that it depreciated 25 to 35 percent in 10 minutes.  No agency or entity or regulator requires the lender to mark down the value of that car to $21,000 as the buyer pays it off over a period of years.

    Most of the scam here is that the actual fair market value of an asset is what a willing buyer pays a willing seller in a free market.  For some observor to come along later & claim that a $300,000 house is now only worth $150,00 is insane.

    Thank you Allen Greenspan.  [dirtbag]


    Question for the assembled wise ones. (none / 0) (#76)
    by Christy1947 on Wed Oct 08, 2008 at 06:52:11 PM EST
    When the buyers of these bought from the mortgage originators or Fannie, did the price they paid reflect the funniness of the loans? That is, did they pay more for a package of thirty years fixeds than they did for no down payment optional payment month arms? Or did the just buy on the credit rating?

    Where there is no market at all (none / 0) (#85)
    by litigatormom on Wed Oct 08, 2008 at 09:31:54 PM EST
    for something -- as there is no market now for mortgage backed securities or credit default swaps -- the value of the asset drops to zero.  Clearly, these assets have a value greater than zero.

    On the other hand, abandoning the mark to market rules enables financial institutions to hide from public shareholders and the government that the financial institutions have become over-leveraged/undercapitalized.


    I think he was giving an example (none / 0) (#19)
    by coigue on Wed Oct 08, 2008 at 03:41:56 PM EST
    of how it can be abused.

    Cutting to the chase... (none / 0) (#44)
    by santarita on Wed Oct 08, 2008 at 05:17:58 PM EST
    if the assets are valued at their fire sale prices, there are financial institutions that are undercapitalized.  Paulson is looking  to get around that sad fact in a way that is somewhat consistent with the idea of "free market".   Hence the thought about buying the assets at somewhere between fire sale and face value.  And hence the idea of "mark-to- market-lite".  The banks don't want to participate in Paulson's auction because then they would have to mark the trash down to Paulson's price and they might be undercapitalized even at that level.  And even if they would not be undercapitalized, they would have to eliminate dividends and take other unpleasant actions to remain properly capitalized.  

    I think Paulson is just doing a holding action until the next Pres. comes in.  Probably the government is going to end up taking an equity position in some of these institutions.  I'd support a HOLC concept that incorporated an equity position for the government in the financial institutions that need help and not like the McCain idea which is essentially to give the government an equity stake in everyone's house.


    Did you see (none / 0) (#46)
    by Steve M on Wed Oct 08, 2008 at 05:20:23 PM EST
    Yes and I saw the Press Conf. (none / 0) (#60)
    by santarita on Wed Oct 08, 2008 at 05:57:27 PM EST
    I think Paulson knows what is needed is capital injection and he is stalling for time until after the election.  

    We should be so lucky (none / 0) (#64)
    by Steve M on Wed Oct 08, 2008 at 06:06:31 PM EST
    I really and truly hope they understand that bold action is needed, and not just a little market-making around the edges.

    I just had a conservative, Obama-supporting colleague in my office who was disappointed by last night's debate, because he came away with the sense that neither candidate truly understood how boldly we need to act in order to work our way through this crisis.  I told him that Obama seems to favor a strategy of sitting on the lead, and all we can do is hope that after being elected he'll do the right thing.


    Well it has been quite some time (5.00 / 0) (#79)
    by IndiDemGirl on Wed Oct 08, 2008 at 07:13:58 PM EST
    since a Dem presidential candidate has had a lead to sit on.  I'm still getting used to the idea myself.

    Yup (none / 0) (#65)
    by andgarden on Wed Oct 08, 2008 at 06:11:00 PM EST
    that's the frustration of supporting Obama.

    Surely you mean (none / 0) (#68)
    by Steve M on Wed Oct 08, 2008 at 06:13:00 PM EST
    that's the frustration of supporting the Democratic Party!

    heh, sure (none / 0) (#70)
    by andgarden on Wed Oct 08, 2008 at 06:30:31 PM EST
    What makes Paulson think (none / 0) (#86)
    by litigatormom on Wed Oct 08, 2008 at 09:32:49 PM EST
    he's going to still be around after the election?

    No Guarantee and... (none / 0) (#88)
    by santarita on Wed Oct 08, 2008 at 10:32:04 PM EST
    that's probably good for the country and for him.

    This crisis is hitting at an awkward time - right before a change of regimes.  If I were a pie-eyed optimist I'd say that Paulson knows that there will be major decisions about our financial system in the near future.  Maybe he is just buying time until the election so that he can include the winners in the tough decisions.  If I were a cynic, I'd be suggesting some other scenarios.


    Well (none / 0) (#89)
    by Steve M on Wed Oct 08, 2008 at 10:44:13 PM EST
    No cabinet until late January at the earliest!

    The Next President Doesn't Need A.... (none / 0) (#90)
    by santarita on Wed Oct 08, 2008 at 11:04:45 PM EST
    Confirmed Cabinet.  He'd better have a transition team ready to rumble the day after the election.  The more I think about things and the more I read, the more I'm convinced that Paulson and Bernanke are trying to set the stage for the next administration.  Paulson's Press Conference today was pretty gloomy.  They are signalling that fundamental changes are coming whether we like them or not.  One of the commenters at Calculated Risk makes the point that the Fed is now being forced to act as the lender of last resort.  It's taking over traditional banking functions because the banks won't perform their functions. I think we are about two steps from nationalizing the banks.  But this will be such a fundamental change that we need to be educated first as to why it is necessary.

    When I think about the last two weeks, I am in awe at how much we (or most of us) have learned about hitherto esoteric financial instruments and concepts.  


    No cram down, no HOLC (5.00 / 1) (#10)
    by lambert on Wed Oct 08, 2008 at 03:34:56 PM EST
    That's the essence of it.

    Now, if only Obama would come out with a better plan than "... [1] encourage [2]Treasury to [3] study the [4] option of buying individual mortgages like we did successfully in the 1930s...." (that being HOLC, though he doesn't mention the acronym.

    Four hedges in that statement, by my count.

    Cram down and HOLC. . . (none / 0) (#16)
    by LarryInNYC on Wed Oct 08, 2008 at 03:39:18 PM EST
    are not related.

    This issue here is not the homeowner getting the principal lowered by a judge during bankruptcy, it's the government voluntarily lowering the principal (and terms) by forcing the banks to take a substantial loss on the principal-and-terms valuation of their portfolios.


    Big Tent D (5.00 / 1) (#14)
    by samtaylor2 on Wed Oct 08, 2008 at 03:38:00 PM EST
    Yesterday you said you were going to talk about the nonsense Freddie Mack claims, I was hoping to get your opinion.  Also I forget what the right calls it, but I was listening to someone talk about how this crisis was all minorities falt and the dems that supported them, and they sighted some law- info about this?

    They are talking about CRA (5.00 / 1) (#21)
    by CST on Wed Oct 08, 2008 at 03:44:14 PM EST
    Which was a bill that was supposed to encourage banks to stop discriminatory redlining.  Here's Wikipedia.  What the right wing won't tell you is that no where do they "force" banks to loan to minorities, it just enables people to fight back on discriminatory practices.

    The problem is not in the loans to minorities, the problem is in the predatory lending practices the banks used to provide these loans, often opting for sub-prime loans.


    exactly right (5.00 / 0) (#29)
    by Iris on Wed Oct 08, 2008 at 04:29:16 PM EST
    the GOP is blaming the victim, as usual.  And kudos to Anglachel for calling out the Confluence writers on jumping in on this.

    Thanks (none / 0) (#22)
    by samtaylor2 on Wed Oct 08, 2008 at 03:45:26 PM EST
    Time to get my edumucation on. :)

    Big Picture (5.00 / 4) (#25)
    by ruffian on Wed Oct 08, 2008 at 03:55:50 PM EST
    Until Obama pushes his own plan, all it is going to look like is that McCain has one and he doesn't.

    Reality (5.00 / 1) (#39)
    by Militarytracy on Wed Oct 08, 2008 at 04:49:34 PM EST
    It burns...............It burns!!!!

    pretty much (none / 0) (#69)
    by Iris on Wed Oct 08, 2008 at 06:28:56 PM EST
    it's a political ploy, but I think your point is they have a tendency to work.  I think BTD's recommendation for Obama to get out ahead of this is probably good advice.

    Giving $ to mortgage lenders... (5.00 / 0) (#26)
    by MileHi Hawkeye on Wed Oct 08, 2008 at 04:00:42 PM EST
    ...instead of homeowners?  Hmmm, sounds just like his health care proposal of giving $ to BigHealth instead of the consumer.  

    I agree--no more corporate hand-outs.  I can manage my own money/mortgage/health care, thank you very much.  

    What is the better answer? (5.00 / 1) (#38)
    by lentinel on Wed Oct 08, 2008 at 04:47:57 PM EST
    The first question last night was:

    "With the economy on the downturn and retired and older citizens and workers losing their incomes, what's the fastest, most positive solution to bail these people out of the economic ruin?"

    Obama took the occasion to point out the deficiencies in Bush's failed economic policies and of course tied McCain to it as well. But, in my opinion, he did not respond the questioner's needs.
    He mentioned more oversight. Cracking down on CEOs. Tax cuts
    for the middle-class. Fixing the health care system. All well and good - and highly iffy.

    McCain said, "... 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 value of those homes and let people be able to make those -- be able to make those payments and stay in their homes". "...until we stabilize home values in America, we're never going to start turning around and creating jobs and fixing our economy."

    I have not had my home taken away because of the predatory lending practices of corrupt financial institutions. But if I were, if I were the questioner, I would be much more encouraged by McCain's answer because it had some specificity to it.

    IMO, Obama used the question as an opportunity to mention his talking points, but did not empathize with the questioner.

    Meanwhile, in Cook County, Illinois (5.00 / 1) (#48)
    by scribe on Wed Oct 08, 2008 at 05:26:16 PM EST
    the Sheriff has announced he will not take part in evictions that are part of foreclosures.

    Part of the issue is, he can't tell who's a rent-paying tenant whose landlord has not paid the mortgage, and who isn't.  And, I suppose, it's not his job to do so.

    There was a similar decision by the Sheriff in Philadelphia a couple months ago, and I am aware of some courts which are slow-walking residential foreclosures by insisting on foreclosing mortgagees dotting every i and crossing every t in painful, correct-typeface-only detail.

    It's going to be fun isn't it? (none / 0) (#49)
    by Militarytracy on Wed Oct 08, 2008 at 05:29:53 PM EST
    I wonder what the local punishment is for squatting too.  Families in the neighborhood could just swap houses then after the foreclosures.

    Some judges are getting very funky with (5.00 / 1) (#81)
    by steviez314 on Wed Oct 08, 2008 at 07:37:41 PM EST

    Remember, the mortgages are no longer owned by the banks, like years past.  They only service the lonas now.  They've been packaged, sliced and diced, and sent off into pools throughout the world.

    Some judges have refused to foreclose because the mortgage holder does not validly appear in court.  Becasue who the hell knows who the real mortgage owner is?


    Phew... (none / 0) (#2)
    by coigue on Wed Oct 08, 2008 at 03:17:43 PM EST
    So down is NOT up, afterall.

    Not market rate. . . (none / 0) (#7)
    by LarryInNYC on Wed Oct 08, 2008 at 03:27:54 PM EST
    which is a squishy term right now -- probably a lot of these homes are still overvalued just because homes aren't selling now.

    The government should buy the loans at some formulaic rate which takes into account current, future, and past market conditions.  And some provision may need to be made in case the homes so taken over either fall more or increase substantially in value (that is, if some of the homes sell after six months for considerably more than what the government paid to take them over it's probably true that some of the profit should go to the government and not the homeowner).

    The devil is in the details.  Or at least, he will be on January 21st when he's no longer in the Naval Observatory mansion.

    You think he's really leaving? (none / 0) (#24)
    by ruffian on Wed Oct 08, 2008 at 03:54:09 PM EST
    I think he's built himself a little room behind a wall, like 'The Inside Man' except that he's no Clive Owen.

    here's a wsj blog about mccain's plan (none / 0) (#27)
    by votermom on Wed Oct 08, 2008 at 04:21:12 PM EST
    with more plan alternatives than was in de long's post
    http://blogs.wsj.com/deals/2008/10/08/mccains-300-billion-mortgage-plan-better-than-the-700-billion- rescue/?mod=googlenews_wsj

    If it's bottomline is giving homeowners a chance to refi at 5.25% over 30 years, why is that a bad thing? One of the big current problems I've heard is that lender refuse to renegotiate, preferring to let homeowners foreclose.

    That part is good (5.00 / 1) (#31)
    by Socraticsilence on Wed Oct 08, 2008 at 04:34:25 PM EST
    The problem is we (the big we the Taxpayers) are essentially buying the mortages at their Bubble Prices and then doing the renegotiation, the difference is then pocketed by the lenders.

    Details would have to be hammered out (5.00 / 1) (#33)
    by votermom on Wed Oct 08, 2008 at 04:40:00 PM EST
    in Congress anyway, right?

    The answer (5.00 / 0) (#32)
    by Steve M on Wed Oct 08, 2008 at 04:35:11 PM EST
    in somewhat technical terms, is here.

    What you absolutely, positively do not want to do is to artificially stabilize housing prices right now.  The air needs to come out of the bubble; obviously, we want to find a way to make it happen without the economy going down the tubes, but you certainly can't solve anything by trying to force home prices to stay at inflated levels.


    Is this is an argument against HOLC like plans? (none / 0) (#71)
    by Manuel on Wed Oct 08, 2008 at 06:30:52 PM EST
    It sounds like it.  I don't think we want to artificially prop up prices at current levels but we do have an interest in smoothing out the decline while not aiding speculators.  Furthermore, I also think we have a collective interest in higher home ownership rates.  Can an HOLC plan be devised that meets these goals?

    Not at all (none / 0) (#78)
    by Steve M on Wed Oct 08, 2008 at 07:12:31 PM EST
    I want to keep people in their homes in order to keep them in their homes, whereas those authors want to keep people in their homes in order to prop up house prices.  They blame the decline in house prices for a "vicious cycle" where falling house prices cause a decline in the value of mortgage-backed securities, and they fundamentally misunderstand the relationship.  Unsurprising for people who didn't even think there was a housing bubble in the first place.

    This much I know (none / 0) (#47)
    by Militarytracy on Wed Oct 08, 2008 at 05:24:32 PM EST
    If we use the FHA to deal with this, the issue of those getting help making a profit on their house in the future is addressed.  Under the FHA rules they will not be making a profit on their properties, that goes to FHA at a later date for helping them out of the mess.  Will those homes ever be worth their current mortgaged inflated prices in 20 yrs if that is the market value granted them?  I don't know but I seriously doubt it.

    what's funny is that (none / 0) (#30)
    by Iris on Wed Oct 08, 2008 at 04:31:07 PM EST
    it's a crap plan on substance, and his own party hates it too!  In the debate replay I watched the instant response dial thingy and watched that red line plummet.

    Now here is an interesting post (none / 0) (#35)
    by Steve M on Wed Oct 08, 2008 at 04:41:39 PM EST
    Cool (none / 0) (#43)
    by Militarytracy on Wed Oct 08, 2008 at 05:17:48 PM EST
    Every day brings us a new come to Jesus moment.

    Is there any mechanism to (5.00 / 0) (#54)
    by oculus on Wed Oct 08, 2008 at 05:38:02 PM EST
    recoup the AIG resort hotel and spa money?  Ticks me off.  Yes, it is a tiny mite in a large mess, but, still.

    I should clarify (5.00 / 2) (#66)
    by Steve M on Wed Oct 08, 2008 at 06:11:58 PM EST
    the AIG mess has been widely misreported as a junket for "company executives."

    It actually was a reward for producers, which is to say, the company's top salespeople.  Now, you could certainly take that away from them, but these are the people who actually make money for the company and keep it afloat.  If you cut their salary and benefits, they're just going to walk across the street to another insurance company and AIG will be worse off for having lost its best salespeople.

    Not to mention, these folks were from AIG's profitable life insurance division - not the entirely separate financial products arm that caused the whole mess at the company.

    I'm not asking anyone to feel sorry for these people, but I do have a good eye for populist demagoguery when I see it.  This junket was not in any sense a reward for the company's top executives or for the people who made the bailout necessary.


    Is it taxpayer money? (none / 0) (#80)
    by oculus on Wed Oct 08, 2008 at 07:21:53 PM EST
    If not, got for it.  

    Deduct (none / 0) (#63)
    by themomcat on Wed Oct 08, 2008 at 06:05:29 PM EST
    from their paychecks!

    I Was Hoping that Paulson Was Signalling That... (none / 0) (#52)
    by santarita on Wed Oct 08, 2008 at 05:34:27 PM EST
    in his press conference.  He was talking about some banks failing and that the government would allow them to fail.  Someone asked him what the criteria would be for the banks that the goevernment would allow to fail versus the ones that it would help.  He didn't answer that very important question.  I think taking a direct equity position is the last thing that Paulson wants to do.  But his hand may be forced.

    The new President is going to have some interesting choices to make early on.


    I see you didn't get the memo (none / 0) (#40)
    by Militarytracy on Wed Oct 08, 2008 at 04:56:55 PM EST
    Talking softly and carrying a big schtick is presidential.  Barack Obama does not talk softly and he does not carry a big schtick, he cannot be president.

    The Same Giveaway (none / 0) (#51)
    by BDB on Wed Oct 08, 2008 at 05:33:08 PM EST
    Since the report I read had McCain using the money already passed.  

    Basically, as I understand it, McCain would agree to overpay for the individual mortgages, which would give the taxpayers the losses and the banks the gains.  The only potential improvement over the current crappy plan is that some might get to stay in their homes if the government were willing to renegotiate their loans.  

    As it now stands, the bailout bill overpays for the combined mortgages, called "troubled assets" and so also moves the losses from the banks to the taxpayers.  Only unlike the McCain plan, it doesn't have anything that might help some people stay in their homes.

    Both suck, but I don't understand why so many like Delong, think McCain's plan is so much worse than what we're already stuck with.  It seems essentially the same.  And Obama supports the current crappy plan which has the same flaws he is already denouncing in the McCain plan.  

    Basically, neither candidate has endorsed HOLC.  Both have advocated for plans that are nothing but giveaways to Wall Street at tax payer expense.


    McCain's Plan Is To... (none / 0) (#58)
    by santarita on Wed Oct 08, 2008 at 05:44:13 PM EST
    give the banks assistance by buying their trash assets at inflated value and requiring nothing from them in return (other than a promise to renegotiate the terms of the loan).  

    When a bank has a mortgage loan on its books and the loan is not performing according to its terms and/or the collateral value is less than the value of the home, the bank has to take a partial charge-off.  If the loan is non-performing, the bank has two options, it can foreclose and own the property or it can do a workout with the borrower which could result in the borrower keeping the house but at a reduced loan amount.  The bank had to write off some of the loan but wins in the end if the borrower performs on the reduced loan.  So MCcain would force the bank to write down its loan (which in many cases would be the reasonable thing to do) but it would give the bank a windfall (the amount it would have to have written off - for nothing.)


    Lenders still take a hit (none / 0) (#82)
    by Robot Porter on Wed Oct 08, 2008 at 09:15:24 PM EST
    from my reading:

    For those that cannot make payments, mortgages must be restructured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they've already suffered.

    From my reading the burden shifting Holz-Eakins is talking about is the difference between the Hope for Homeowners Plan and McCain's plan.

    In the Hope plan, mortgages would be purchase at 90% of market value, then refinanced for homeowners at 100% of market value with the government benefiting on that 10% difference.

    In McCain's plan, the lenders are paid 100% of market value, and the loans are refinanced at 100% of market value.  The lenders don't take as much of a hit as they do in the Hope plan, but they still take a hit between the original value of the mortgage and the current market value.

    I don't think he's arguing that the lenders should be paid the full value of the original mortgage.

    But I could be wrong.  I'm not an expert on this.

    McCain makes clear (none / 0) (#91)
    by Big Tent Democrat on Thu Oct 09, 2008 at 07:10:41 AM EST
    that is  is just a bank bailout.