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.