During last night's presidential debate (which he lost badly) Republican John McCain vowed that if elected he would order the U.S. Treasury Department to purchase "bad mortgages" to help people avoid foreclosure. It's an idea that deserves consideration.
According to Bloomberg News, the McCain campaign estimates that it would cost $300 billion, some of which would be diverted from the $700 billion rescue of Wall Street. The Arizona senator did not provide specifics during the debate. Democrat Barack Obama proposed a similar idea during a press conference last month, according to Bloomberg. These proposals raise many questions.
First of all, can the government afford to purchase both mortgages and mortgage-backed securities? How will the government determine who gets help? Many people bought homes they could not afford because of criminally lax lending standards at some banks. Others were hoodwinked by unscrupulous mortgage brokers into taking adjustable-rate mortgages when they qualified for cheaper fixed-rate 30-year loans. These individuals are the most deserving of the government's help. Officials should try and help other distressed mortgagers provided that they can afford their properties. Otherwise, they should be given assistance to find affordable housing.
Free market conservatives probably will lose their lunches over the thought of further government intervention in the housing market. But I don't see how it can be avoided. The decline of the housing market is at the core of the economic crisis. The Wall Street Journal noted today that nearly one in six U.S. homeowners owe more on their homes that they are worth. That's unbelievable.
The news is not entirely bleak, however. Mortgage applications are rising because of low interest rates, according to the Mortgage Bankers Association. With a glut of homes for sale, there are plenty of bargains to be had for creditworthy borrowers. Unfortunately, foreclosures are also at record levels, which should keep home prices depressed for a while.
Any government rescue of homeowners would be extraordinarily expensive and complicated to administer. It's also very necessary at this point.
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Reader Comments (Page 1 of 1)
10-08-2008 @ 11:49AM
JCH said...
The goal of the Ownership Society was 5.5 million houses. They had to have gotten close to the goal by the day, January 31, 2007, Barney Frank assumed the chairmanship and started repairing things, which were, obviously, beyond repair after 6 straight years of monumental stupidity.
Almost all of them are going to become foreclosures - even the fixed subprime.
I don't think 300 billion even makes a dent, and it's a terrible idea.
The correct thing to do is convert the loans to fixed payment, variable term loans. In a given year, if the interest-rate reset is upwards, then you calculate how long it would take to pay off the loan at the fixed payment with the reset rate, and lengthen the term of the loan.
So one year a loan might be a 500 year loan, and the next a 90, and the next a 25, etc.
Since the owner of the note would always be getting market rates, I do not think he is getting too screwed for being so stupid for having done this to his country. The taxpayer would be out zero dollars.
The guy who should have remained a renter, would essentially again be a renter.
10-08-2008 @ 11:55AM
JCH said...
The goal of the Ownership Society was 5.5 million houses. They had to gotten close to the goal by the day, January 31, 2007, Barney Frank assumed the chairmanship and started repairing things, which were, obviously, beyond repair after 6 straight years of monumental stupidity.
Almost all of them are going to become foreclosures - even the fixed subprime.
I don't think 300 billion even makes a dent, and it's a terrible idea.
The correct thing to do is convert the loans to fixed payment, variable term loans. In a given year, if the interest-rate reset is upwards, then you calculate how long it would take to pay off the loan at the fixed payment with the reset rate, and lengthen the term of the loan.
So one year a loan might be a 500 year loan, and the next a 90, and the next a 25, etc.
Since the owner of the note would always be getting market rates, I do not think he is getting too screwed for being so stupid for having done this to his country. The taxpayer would be out zero dollars.
The guy who should have remained a renter, would essentially again be a renter.
10-08-2008 @ 12:26PM
william lindblad said...
This is an idea that sounds good but in reality is little more than political rhetoric.
It could only work if you can find out who is "deserving". Is a speculator that got in trouble by borrowing against their principal residence to buy two or three other houses "deserving"? On paper it would look like it as the other properties would not appear. Is an opportunist that saw a quick trip into luxury "deserving"? Not everyone in this mess was a pawn of some unscrupulous broker. Many are licensed real estate agents and brokers themselves. Where do you cut this off?
Are we to help out with notes of 3/4 million and up?
It would cost more to sort it out than it would achieve and be so full of corruption that it would only be a new corridor for more financial problems.
10-08-2008 @ 12:39PM
william lindblad said...
JCH - Barney Frank repaired what?
You ever listen to the House finance committee hearings?
I do. The only person that made mention of a serious problem was the last Sec. of Hud, Al. Jackson. He was against raising the the Hud mortgage limit. Barney & co wanted it UP. If that is fixing a problem than the fire companies should pump gas on a blaze rather than water
Jackson also said that there was reason for concern - he was never invited to another hearing.
10-08-2008 @ 1:03PM
Fran said...
I totally agree with the previous comment.
I am a fiscally responsible person who has
always lived within my means! Not only
is my retirement account dwindling but
not I have to higher taxes to bail out
people who bought things they knew
they couldn't really afford.
10-08-2008 @ 1:26PM
tammy said...
The assistance given to people who are losing their homes is very nice, but the fact still remains that adults in this country, who should know their financial capabilities need to take responsibility. It is common sense that if you are not making enough money to purchase something, then you either do not buy it or you need to save enough money in order to buy it. Why is it that people thought that these "easy mortgage programs" would be a good thing to have. My fellow Americans, if something is too good to be true, it usually is. I take heart in the fact that everyone in America has a dream and goal of owning a nice home to call their own, but realistically, we all have to work hard in order to achieve these goals. Granted unscrupulous lenders had a green light to get these folks to fall for their schemes, but we the people are ultimately responsible for our actions. We all have hard times, but we also need to know our limits. Government assitance should be just that, assistance, not a way of life where folks sometimes take advantage. Folks need to educate themselves on basic things that can in the long run make them successful, independent individuals, allowing them to attain whatever their goals are. It shouldn't matter who you are or where you come from, the opportunities are there, you just have to want them enough to go out and grasp them.
10-08-2008 @ 3:03PM
henry said...
this is welfare all over again, just taking a different angle this time. the hard working Americans that do due diligence by being responsible are hit again by the ones that cant live within there means! here we go again!!!