McCain goes long-ball with mortgage buyback … warning track or outta here ?

Ken’s Mega-Take: McCain rolled this grenade out last night, but didn’t explode it for impact. 

After researching the terms and conditions (below), I think McCain may be on to something.  A potentially good deal for the economy, but not clear to me how many votes it wins. The mortgage mess is concentrated in a few states:  McCain has Arizona locked and has no chance in California; but plan could help in  Florida, Nevada, Ohio. 

Keep in mind that only 75 million homes are “owned”, and 85% of folks are “above water” and making their payments (1/3 of homeowners own their homes free and clear of any mortgages). There could be backlash from honest, hard-working folks who don’t want slackers and cheats bailed out — whether on Wall Street or down-the-street.

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Excerpted from Politico.com: “McCain proposes bailout for homeowners”,  10/7/08 

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Qualifiers

The McCain “American Homeownership Resurgence Plan ” would be available to mortgage holders that:

1)  live in the home (primary residence only)

2) can prove their creditworthiness at the time of the original loan (no falsifications)

3) provided a down payment

Ken’s Take: Excludes investor-speculators, frauds, and folks who never had any equity in the home … I think the program is limited to the right group

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Structure

The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner.

The direct “cost” of this plan would be roughly $300 billion, the amount of homeowners’ “negative equity” in some homes.

Funds provided by Congress in recent financial market stabilization bill can be used for this purpose; indeed, by stabilizing mortgages, it will likely be possible to avoid some purposes previously assumed needed in that bill.

The plan could be implemented quickly as a result of the authorities provided in the stabilization bill, the recent housing bill, and the U.S. government’s conservatorship of Fannie Mae and Freddie Mac.

Ken’s Take:

1) What if “they” can’t qualify under the revised terms?  What if housing prices continue to decline and the homes go back under water ?

2) The initial cash out flow to buy the loans will be greater than $300 billion … but the eventual “cost” will only be the buy-out of the negative equity.

3) I like the idea of buying a mortgage versus buying a derivative based on a pool of mortgages owned by a trust and serviced by a third party.  At least I can understand where the money is going.

4) Reminder: in July 2008, Congress enacted a program to do just this — save for the government eating the lost equity

5) By my recollection, this is essentially the business that Fannie and Freddie were originally commissioned to transact.

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Political Talk

AMERICAN HOMEOWNERSHIP RESURGENCE PLAN

McCain said he will direct his Treasury secretary to implement an American Homeownership Resurgence Plan (McCain Resurgence Plan) to keep families in their homes, avoid foreclosures, save failing neighborhoods, stabilize the housing market and attack the roots of our financial crisis. America’s families are bearing a heavy burden from falling housing prices, mortgage delinquencies, foreclosures and a weak economy.

“It is important that those families who have worked hard enough to finance homeownership not have that dream crushed under the weight of the wrong mortgage. The existing debts are too large compared to the value of housing. 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.

The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes. By purchasing the existing, failing mortgages, the McCain Resurgence Plan will eliminate uncertainty over defaults, support the value of mortgage-backed derivatives and alleviate risks that are freezing financial markets.”

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Source article:
http://www.politico.com/news/stories/1008/14377.html

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4 Responses to “McCain goes long-ball with mortgage buyback … warning track or outta here ?”

  1. Alan Tyler Says:

    I’ve not heard of a more unjust proposal. What about the guy like me who declined the 1/2 a million dollar mortgage I knew I could not afford, and instead saved by sacrificing and living below my means in hopes of the same American dream.

    I now have to pay for the homes of those who behaved less prudently ? How does this plan help those of us who did not make this mistake , or are we simply here to fund this foolish idea ?

  2. Mortgage Trader Says:

    Isn’t this Hillary Clinton’s plan? And isn’t this the best argument EVER against privatizing social security (since we are admitting that we will ALWAYS bail old people out)?

    More importantly, would we focus on bank owned properties or those underlying mortgage-backed securities? If we help the “bank owned” group we would NOT directly aid the toxic assets that caused the crisis. It would still sit on balance sheets like a time bomb. If we help the “mortgage underliers” we are ignoring the rule of law and potentially rewriting EVERY CMO contract in existence. When you write down a loan who would take the loss? The lowest subordinate tranche? Share it pro-rata?

    In that environment I would NEVER bid a bond because it is impossible to analyze/price for political risk. Or I would have to reduce my bid by an amount equal to any possible write-down in the future. In those situations the price MUST continue to drop and we are back to square one – banks with worthless assets.

    But Alan probably has the best argument of all. Whatever happened to following the rules? If the rule of law is non-existent in the US why would anybody invest or do business here?

  3. Chris Hairel Says:

    Current cap gains tax laws allow for an exemption when selling a primary residence. Would the government get a cut of the capital gains if that poor, put-upon home owners goes on to reap a windfall profit when he sells the house?

    The banks have to issue warrants to the Treasury as a price for getting bailed out. Seems like the same principle should apply here too.

  4. Mark Roberts Says:

    A very well written article. Thanks for the good tips!

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