Sen. McCain’s HOME Plan: Late to the Party with a Flawed Plan
Listen to a press call about McCain’s corporate tax plan with John Podesta, Sarah Wartell, James Kvaal, and Robert Gordon:
Attempting again to respond to critics about his weak grip on economic issues and the absence of an economic strategy, Senator John McCain (R-AZ) today offered a kitchen sink of economic proposals, including a long-awaited response to the housing and credit crises.
In his remarks, Sen. McCain makes clear that he continues to oppose providing “funds to purchase homes in foreclosure.” What he fails to understand is that foreclosed properties in a neighborhood depress the home values of innocent neighbors who happen to live down the street or around the corner from a foreclosed property—or increasingly a slew of foreclosed or abandoned homes. In addition to attracting crime and vandalism, foreclosed and abandoned properties will effectively evaporate the home equity savings of millions of American families—savings that they hoped to use to send a child to college, for retirement, or for a job loss or medical emergency.
The vast majority of Sen. McCain’s colleagues understand this fundamental point. The bipartisan legislation that passed the Senate today by a vote of 84-12 includes $4 billion for such a Neighborhood Stabilization fund. Both House Financial Services Committee Chairman Barney Frank (D-MA) and Senate Banking Committee Chairman Christopher Dodd (D-CT) include community stabilization resources in their legislation. And the idea is taking off around the country. Governor Deval Patrick of Massachusetts included the same proposal in an economic recovery package he announced yesterday. But states are calling upon the federal government for resources for this need, as evidenced by a bipartisan letter from the National Governor’s Association.
Senator McCain’s HOME Plan: Late to the Party with a Flawed Plan
Sen. McCain finally recognizes what Treasury Secretary Henry Paulson, federal regulators, and the Bush administration-inspired HOPE NOW Alliance figured out 12 months ago—we need to encourage lenders to write down at-risk mortgages to a value that is both sustainable for the borrower and relates to the current value of the property. Unfortunately, the administration’s efforts to extort lenders to do this on their own have failed. The time has come for more powerful government action to drive mortgage restructurings. If not, we face the prospect of a more radical government intervention like direct government ownership of failed assets, as in the savings-and-loan crisis of the 1980s.
Sen. McCain’s proposal to get there doesn’t make the grade. By the McCain campaign’s own (highly optimistic) estimates, his plan would help 200,000 to 400,000 borrowers—when 2.2 million homeowners today face foreclosure. And the plan explicitly excludes those who were victims of predatory lending from participating. Eligibility criteria requires that borrowers were creditworthy at the time the original loan was made, yet many of those steered to high-risk mortgages were not “creditworthy” for a loan of that size and terms.
The key issue today is whether borrowers currently show the capacity to repay the loan at a new principal amount. Why should those who were most victimized by the worst subprime mortgage practices be the first excluded from help?
Then there’s the fact that Sen. McCain’s plan would be available only to those with an original subprime loan. Today’s mortgage crisis extends far beyond the subprime market as more and more prime borrowers are “underwater,” owing far more on their homes than the property is worth. If we cannot restructure the loans of viable borrowers into new mortgages, then the larger goal of stabilizing housing prices and restoring credit market liquidity won’t be reached.
Finally, the senator’s plan relies on the homebuyer to apply for the refinancing. Alas, as the administration’s own failed voluntary efforts reveal, far too few borrowers will seek out available assistance. And a loan-by-loan approach is not realistic given the scale of the problem.
The Center for American Progress has proposed a concept included in legislation proposed by Chairmen Frank and Dodd that would allow for bulk transfers of pools of loans to new owners without the conflicts of interest and legal liability concerns of current securitization trusts. These new owners could triage the pools, hold what works, work with borrowers to terminate loans that are not salvageable, and restructure the remainder quickly through streamlined procedures.
That’s the right approach. After all, by the time Sen. McCain’s new HOME Plan is up and running and borrowers apply, it would be too late.
Sarah Rosen Wartell is the Executive Vice President, Center for American Progress Action Fund and a former official at the Federal Housing Authority
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