More on McCain $300 Billion Floor

Jacob Sullum | October 16, 2008

John McCain had more to say about his mortgage plan in last night's debate:

I am convinced that, until we reverse this continued decline in home ownership and put a floor under it, and so that people have not only the hope and belief they can stay in their homes and realize the American dream, but that value will come up.

The first thing you should notice about that sentence is that it isn't, strictly speaking, a sentence. "Until we reverse this continued decline in home ownership," McCain presumably meant to say, some wonderful thing will never happen, or some terrible thing will continue to occur. But since he left the thought incomplete, we can fill in the blank however we like. Feel free to offer your suggestions.

McCain also provided further evidence that his taxpayer-funded mortgage assistance would not necessarily be based on need:

Now, we have allocated $750 billion. Let's take 300 of that...and go in and buy those home loan mortgages and negotiate with those people in their homes, 11 million homes or more, so that they can afford to pay the mortgage, stay in their home.

It sounds like he's talking about people who are having trouble scraping together their mortgage payments. But as I noted in my column yesterday, the 11 million figure is his campaign's estimate of borrowers with negative equity (who may be perfectly capable of paying off their current loans), not borrowers who are about to lose their homes to foreclosure. Does McCain really think middle-class taxpayers should be forced to subsidize wealthy homeowners who bought mansions at inflated prices?

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|10.16.08 @ 10:03PM|#

Yeah, so now, not only do the local banks have to compete with subsidized state industries, but the government plans to cut the rug out from under them by arbitrarily reducing the principle on their loans.

Under the new socialist regime, banks aren't allowed to make profits. They are merely vehicles for housing subsidy programs.

Apostate Jew|10.16.08 @ 10:07PM|#

He's going to buy 11 million mortgages for an average price of just over 27,000 dollars each?

How do I get in on this deal (as a buyer)? Hell, if I only have to pay 25 cents or less on the dollar (that was a wild guess but can't be too far wrong) I can afford to forgive a quarter of the principal, cut the interest rate a little and still make a killing.

What, he was just throwing nonsensical numbers out there to impress the hoi polloi, I refuse to believe it.

Elemenope|10.16.08 @ 10:11PM|#

Yeah, so now, not only do the local banks have to compete with subsidized state industries, but the government plans to cut the rug out from under them by arbitrarily reducing the principle on their loans.

My thing is (beyond the patent insanity of actually doing what McCain describes), how on Earth could it even be legal? Can a court just unilaterally, and without legislative grounding, fiddle with the terms of a contract till some public policy goal is reached?

Isn't there a clause somewhere in the owner's manual about impairing the obligation of contracts?

Bueller?

|10.16.08 @ 10:13PM|#

I'm not a smart man but wouldn't doing a re-fi on 11 million mortgages at current home values be damaging to both the banks and the housing market?

|10.16.08 @ 10:14PM|#

If John McCain wins and you get an opportunity to repurchase your house in such a way that you will save tens, or hundreds, of thousands of dollars, will you do it?

We would look pretty stupid if we were the only people in the country who didn't take advantage of the largess. Oh, we'd have our dignity and our principles, paying more on our mortgages than we have to. How noble of us.

All you have to do is say that you are having a hard time paying your bills and the Gubmint mortgage fairy will come and make everything better. Hey, Mort Zuckerman said he liked the idea on McClaughlin group last Sunday. Is it any worse than any of the other ideas? They already voted themselves the money. They are just debating on how to use it.

|10.16.08 @ 10:15PM|#

Apostate Jew, you make goos points there. At least one of those numbers has to be very wrong. I suspect it would be in the total dollars amount.

|10.16.08 @ 10:17PM|#

Does McCain really think middle-class taxpayers should be forced to subsidize wealthy homeowners who bought mansions at inflated prices?

As a matter of fact, he does, and said so explicitly, in the very next passage.

Now, we have allocated $750 billion. Let's take 300 of that billion and go in and buy those home loan mortgages and negotiate with those people in their homes, 11 million homes or more, so that they can afford to pay the mortgage, stay in their home.

Now, I know the criticism of this.

Well, what about the citizen that stayed in their homes? That paid their mortgage payments? It doesn't help that person in their home if the next door neighbor's house is abandoned. And so we've got to reverse this.

If the government actually does this can all the renters get a class action suit going? Some sort of a, discrimination against responsibility claim?
IOW, where's my farkin handout?

|10.16.08 @ 10:20PM|#

It's impossible to tell, from what McCain said, whether this is a completely nonsensical idea, or if there is a logical idea, and he just explained it poorly.

and what does the "R" next to McCain signify?
Retooled? Redesigned? Redistribution? Reinvented?

|10.16.08 @ 10:29PM|#

The jaded, pessimistic cynic in me wonders if McCain is just looking for the largest group of voters he can give a fat gift to without looking completely unrepublican.

Kolohe|10.16.08 @ 10:34PM|#

My thing is (beyond the patent insanity of actually doing what McCain describes), how on Earth could it even be legal? Can a court just unilaterally, and without legislative grounding, fiddle with the terms of a contract till some public policy goal is reached?

I presume that McCain will get legislative authority for his proposals (such like when either one says 'i will lower your taxes')

But, you can't presume too much regarding executive authority these days. It makes a 'pres' out of 'u' and 'me'.

Kolohe|10.16.08 @ 10:38PM|#

Isn't there a clause somewhere in the owner's manual about impairing the obligation of contracts?
this:

pass no .... Law impairing the Obligation of Contracts

is under 'powers prohibited to the states'. It's not specifically called out in the powers denied to Congress

There's the ex post facto thing, but that is also specifically called out separately in the state prohibition as well.

somedude|10.16.08 @ 10:43PM|#

And Obama's the socialist?

This is far more destructive to society than messing with the top tax bracket.

In Los Angeles for example:

1)Houses are almost double what they were in 2000. Incomes barely rose.

2)Only 15% of households can afford the median home assuming a 10% downpayment (a big assumption).

3)Housing has only returned to the level it was in April 2004. Still bubble times.

This is the floor in housing we want to create?

Why screw new home buyers by never allowing them to enter the market? Just so the stupid home buyers of the last 5 years can have a more inflated asset to borrow against?

Unless you've lost your job, only speculators lose their homes to foreclosure when the value drops!!!

Elemenope|10.16.08 @ 10:44PM|#

is under 'powers prohibited to the states'. It's not specifically called out in the powers denied to Congress

Good point.

KG|10.16.08 @ 11:11PM|#

It doesn't help that person in their home if the next door neighbor's house is abandoned.

Yes, because the bank who bought the house at the foreclosure sale isn't going to try and sell it, so the house is just going to be empty for all eternity. What kind of insanity is? If nothing else, the banks will sell to someone rich who can then rent the property out. Banks don't want hard assets, it makes it rather difficult to lend their liquid assets.

\"Until we reverse this contin|10.16.08 @ 11:15PM|#

...I'm confident that I'll retain your complete attention."

|10.16.08 @ 11:20PM|#

Well, KG, to be fair to McCain, foreclosed homes do tend to sit for a long time. There are stories about neighborhoods full of abandoned houses. You might have noticed, it can be tough to sell in this market.

Don the libertarian Democrat|10.16.08 @ 11:22PM|#

McCain Is Confused, Once Again
Good post from Felix Salmon this morning on McCain's attack on Fannie/Freddie and his devotion last night in the debate to home ownership:

http://www.portfolio.com/views/blogs/market-movers/2008/10/16/hexed#blogComments

"I thought the right-wing talking point was that CRA and Fannie and Freddie lent money to too many people, thereby driving homeownership up past any point of reasonableness. In fact, of course, it was the subprime lenders who did that. But either way, homeownership rates are far too high, and need to come down. Insofar as there has been a "decline in home ownership" it's been not only necessary but recent, and not very big. If McCain really wants to reverse it, one has to wonder what exactly his complaint is about Fannie and Freddie."

KG|10.16.08 @ 11:40PM|#

joe, I know houses can sit for a while after foreclosure, seen a couple in my neighborhood, and being involved in mortgage fraud litigation (as an attorney), I'm well aware of the situation. But it's only tough to sell in this market if you are expecting to sell at the price you could have 3 years ago. If you actually offer a house at what the market will bear, you'll sell the house. You'll also likely take a loss, but that's the risk that lenders run when they make mortgages, it's also why they take a secured interest in the property as collateral.

nonPaulogist|10.16.08 @ 11:42PM|#

Propping up prices is what prolonged the downturn of 1929 and turned it into the great depression.

Why is it wrong for OPEC to attempt to put a floor on oil prices and right for us to put a floor on home prices?

zoltan|10.16.08 @ 11:54PM|#

Mike Farmer|10.16.08 @ 11:56PM|#

I think he is talking about the government buying the mortgages from the banks (so the banks get their money) then readjusting terms so that homebuyers can make the payment, like the government giving them a lower interest rate or extending the loan to over 30 years -- whatever, to allow the homebuyer to make the mortgage payment he/she can afford.

Most of these mortgages though are wrapped up in complicated security packages (? I think that's the terminology) so it would be almost impossible to unravel them. It's an impossible idea, but i think that is what he means -- it would probably be based on some assessment of the buyer's ability to pay the current mortgage and the probability that the buyer would go into bankrupcy without the gov. buying the mortgage.

|10.17.08 @ 12:25AM|#

If McCain really wanted to come back, he would have picked J.D. Drew as his running mate.

Mike Farmer|10.17.08 @ 12:31AM|#

I wish Atlanta had kept Drew.

bob mologna|10.17.08 @ 1:14AM|#

"and what does the "R" next to McCain signify?"

RETARDED, REVOLTING, REPUGNANT...

I'm going to stock up on booze and drink myself silly on election day.

Ebeneezer Scrooge|10.17.08 @ 3:56AM|#

and what does the "R" next to McCain signify?

After the last debate, it clearly means rabid. He hasn't had his shots, and that's why he's loosing. After the election is over they may have to put him down.

The Republican Party is going down with him.

If only there was a way to extract two Bushes and a McCain from the Republican Party. Then the Democrats and Republicans would be at each other's throats again. Then, the whole approach of divided government would be viable again.

You don't know how scary it can get until divided government actually breaks down. The Democrats and Republicans need each other.

Ebeneezer Scrooge|10.17.08 @ 4:02AM|#

Okay, so now that the cats are out of the bag, which was the worse choice:

1) Republicans nominate McCain

2) McCain nominates Palin

McCain choosing Palin makes some sort of twisted sense. But The True Logic of it evades me.

I suspect this is because I've had my shots.

Does anyone know if a moose can get rabies? Nah, they just get Mad Moose Disease.

Now see, there's the logic. Teddy Roosevelt was depicted as a moose in political satire, I know I saw it in a dictionary somewhere.

Somehow, this is the key to the missing link in the logic that connects McCain to Palin.

And I think I better go get my shots updated.

Ebeneezer Scrooge|10.17.08 @ 4:27AM|#

Moving on to more mundane topics, I've got a question, and then a suggestion for McCain. See if this logic makes any sense.

The roots of our current financial mess are:

1) Banks aren't lending each other money, because nobody knows who's books are any good. Your buddy bank down the street could spontaneously ignite before your eyes over lunch tomorrow.

Which is because, the housing market is still way over priced, and houses are around a third of the US asset base that banks use for collateral when making loans.

So the root of the banking problem is that right now, nobody really knows what the collateral base is for extending credit.

The banks will not be able to clear their books out and find out who's still standing, until the price of houses (currently orbiting Pluto) has fallen back to earth.

2) Nobody is buying houses. Not because Joe the Plumber, or even Bob the Cow, can't get a mortgage. If you've got good credit and a full bale of hay to put down on it, you can probably get a mortgage today.

The problem is that everybody knows houses are still way over priced.

That being my theory, but I'm a mere engineer and not a hallowed economist (and I vehemently deny deny being a rabid moose). So has anyone seen an estimate of how many people right now actually owe more on their houses than they're worth?

To answer my own question, of course not. Because nobody right now knows what they're really worth. Silly me.

So Bush is buying into the banks and he's going to make them lend money to each other "like normal". Or else.

The only problem is that even if he can force the banks, people still aren't going to be buying houses.

This whole problem we've got would go away, if people would just start buying houses again. So why doesn't McCain propose a law requiring all US citizens to go out and buy a house.

Or else.

Or else,the banks are going to have no choice but to stop loaning dollars and start loaning foreclosed houses.

Ebeneezer Scrooge|10.17.08 @ 4:36AM|#

the 11 million figure is his campaign's estimate of borrowers with negative equity

No, I haven't seen any estimates like this laying around. And if you assume it's a good estimate (never trust a rabid moose), we're still only talking something like 3 or 4 percent of the US population.

Saving these people isn't going to fix anything. We need the price of houses to crash and burn before anything is going to get better.

|10.17.08 @ 6:47AM|#

"So why doesn't McCain propose a law requiring all US citizens to go out and buy a house."

Or offer a tax credit to single family, owner occupied houses purchased after some date certain; like maybe the date that the Fed authorized $835 billion uncommitted dollars for the bail out.

Sort of like back in the 70's when I bought my first house. Had to put down 5% and Uncle Sugar gave me a 5% tax credit the very next April 15th. Sweet.

CB

Mike Farmer|10.17.08 @ 6:56AM|#

Actually, McCain's plan wouldn't have any direct effect on values, it would just take the mortgages and readjust them so the buyer can continue making the mortgage. If the "owner" tried to sell, he/she would still have the problem of what a buyer would pay for it. It just means that government would be stuck with the house if the "owner" still can't make the payment after readjustment or has to move for some reason and can't sell the home to pay off the mortgage.

It would affect the number of foreclosures for a while which could indirectly keep home prices from falling to the foreclosure price, whatever that would have been. But we're talking about such a small percentage, I don't think that would matter much. There are still enough houses selling where I live to establish market value. High home prices is not the problem all over the country, loss of confidence is the problem. Perhaps in California and Florida high home prices are the problem and they need to come down, but in many areas, it's just lack of confidence and foreclosures from bad loans to people who can't make the payments. In many areas, if confidence returned in the overall market, homes are still affordable at all ranges of income

I don't believe government should get involved, though -- banks can readjust loans and keep them on the books if they want to -- but, again, the problem is that they have been sold and wrapped up in complex securities and it's a mess. At least this is how I understand it.

VM|10.17.08 @ 8:25AM|#

Does anyone know if a moose can get rabies? Nah, they just get Mad Moose Disease.

hrumph.

|10.17.08 @ 8:58AM|#

and what does the "R" next to McCain signify?

Rrisoner of Rar in Rietnam.

|10.17.08 @ 9:00AM|#

What to do if cornered by a moose.

renter|10.17.08 @ 9:11AM|#

Mike Farmer:

It's not just California and Florida - here in Northern Virginia the price/rent ratio is >20 and in many cases >22 or so. I can't imagine that Virginia, California, and Florida are the only places with a sustained bubble.

The house that I rent (about 1050 ft^2) was bought in 2001 for $305k, according to Zillow - asking value for similar houses is around $575k, and that's the absolute lowest you will see a single family house.

I don't know how you can look at that and not see a bubble that needs to be deflated.

renter|10.17.08 @ 9:12AM|#

I should have used an active verb there; make it "bubble that needs to deflate" to avoid any pro-intervention interpretations.

Mike Farmer|10.17.08 @ 9:28AM|#

Renter,

I meant places like Florida and California -- this is a large country and not all areas went up in value like those areas and the area you live in -- I imagine in VA there was a wide variation of price rises throughtout the state.

here in GA, Atlanta rose significantly compared to Savannah, but not so much compared to, say, Los Angeles in Calif.

You can't say prices rose equally across the country -- there were bubble areas and areas where there was no bubble.

Mike Farmer|10.17.08 @ 9:31AM|#

Whereas the financial crisis is national, home prices are local.

Citizen Nothing|10.17.08 @ 9:36AM|#

A Møøse once bit my sister ... No realli! She was Karving her initials on the møøse...

|10.17.08 @ 9:45AM|#

Moose are large, unpredictable and easily surprised

Hey, VM:

BOO!

|10.17.08 @ 10:05AM|#

He's going to buy 11 million mortgages for an average price of just over 27,000 dollars each

Well the $27k is probably the average amount those 11 millions mortgages are underwater. Home values would probably come down under this plan because at least some homeowners would be willing to sell and get out with their hands clean.

If McCain really wanted to win the election, he would have opposed the bailout for Wall St. and proposed this plan or a similar one instead. A guy posted on The Economist site a pretty good plan, which I re-post for you in full:

Paulson's plan will fail because it treats only a symptom and not the cause of America's financial illness, which is: Too many were persuaded to buy more house than they could afford by irresponsible, greedy writers of innovative new mortgage types. Everyone was operating on the "greater fool" theory and assuming the un-payable mortgage would clear later when the house was resold. Many of these mortgages writers knew it was a criminal Ponzi scheme, designed to collect large bonuses.

A real cure must:
(1) Restore liquidity to financial system. (Make the toxic paper worth face value.)
(2) Get Joe American into housing he can afford.
(3) Transfer real assets, not toxic trash, to Uncle Sam.
(4) Not significantly increase US's already excessive debt.
(5) Prevent repetition of the problem.

This is possible as follows:
SUMMARY:
U.S.'s money automatically buys houses at foreclosure auctions if highest bid is less than the mortgage debt, not toxic trash from banks. The banks are helped as they know the foreclosure sales will cover the mortgage so this is an anti-dote to the toxic poison they now hold. I.e. from POV of the banks, not one piece of this paper is worth less than face value. Everyone knows this so, it becomes a marketable security. If the bank needs more liquidity, they can sell it and make new loans. Goal (1) accomplished.

The ex CEO of Goldman Sack's plan helps GS and others holding toxic loans by transfer of them to Uncle Sam. It just sticks Joe American with the toxin but is no anti-dote for the poison.

Here is the anti-dote:

The government buys partial ownership of EVERY foreclosed house, if it would otherwise sell for less than the mortgage. Joe may remain in the house for up to one year with deferred interest bearing rent. During that year, Joe must find a home (house, apartment or trailer) he can afford, at least to rent. Then, when opportunity exists to recover the price paid, Uncle Sam sells his ownership share of house, which may be more than the price paid as this plan is taking houses off the market. - Keeping price of houses from falling every month as they are now, and will continue to fall under Paulson's plan, which only aids the banks, not the real-estate industry or evicted Joe. When Joe gets out from under some of his debt, he begins to pay his deferred months (<13) of rent and interest, over 5 years if need be.
Goals (1, 2, & 3) accomplished.

Goal 4: Instead of an immediate $700 billion increase in US's debt ceiling, banks send bills to Uncle Sam for ONLY the DIFFERENCE between the unpaid mortgage amount and the price some buyer paid at public foreclosure auctions as they occur, if sales price was less than the mortgage still due. Uncle Sam then receives that fraction of the house's title in exchange for paying this difference. Individual auction sales are semi-automatic with bank processing all transactions details but periodically inspected. I.e. US is a "silent partner" (minority owner or land-lord renting*) for a few years, but investors may buy the US's share of title anytime provided US profit equals what US would have received in interest by investing in 10 year Treasury bond, as well as full repayment of the "difference funds" provided initially.

As individual auctions are expensive, many "under water" owners may avoid foreclosure auctions and simply transfer the entire title and debt to US (FHA?) for later sale** in collective auctions. By avoiding auction expenses, Joe hopes to get small check later, if the house sells for more than the mortgage debt. If house is re-possessed by the bank and not sold at auction, the bank may also transfer title to US and receive the unpaid mortgage due. In any case, bank receives full repayment of the mortgage due.
Goals (1) & (4) accomplished.

Goal 5 may require new legislation and/or adequate enforcement of existing laws; however, criminal miss-representation by greedy creators of these inventive new mortgage types should not go unpunished. Bonuses they received for writing and selling these trouble making mortgages should be return 100% with interest to their firms (golden parachutes of their now retired CEOs included). If they cannot afford to do so, some of their assets should be ceased. They also may transfer titles to US (FHA?) to avoid extra cost, criminal prosecution and probable*** jail time. It is a well accepted principle of law that criminals are not allowed to keep the loot they took. Ponzi schemes are illegal and these greedy CEOs should have known that was what they were doing. Do not let them now pass their toxic trash to Joe.

-------------------------
*If Uncle Sam receives a fraction of the title of house sold at auction, and it is rented by buyer, Uncle Sam receives that fraction of the rent and pays none of the maintenance expenses.

** Joe remaining in "his house" after US(FHA?) holds the entire title via "rent to buy" instead of sale is best option, if Joe can afford rent to buy

|10.17.08 @ 10:12AM|#

Interesting.

|10.17.08 @ 10:34AM|#

So has anyone seen an estimate of how many people right now actually owe more on their houses than they're worth?

To answer my own question, of course not. Because nobody right now knows what they're really worth. Silly me.

Anecdotal response:

My wife and I bought our current home ($450K) in 2004--20% down, the vast majority of which came from the sale of our smaller abode, with a 30-year fixed-rate loan on the reamining 80% ($360K mortgage). Are we upside-down? Yep. A couple of comparable homes in recent *non*-distressed sales sold for $259K and $255K. So the local market "knows" what homes are worth, even if you, the banks and the gov't don't know. We have no plans to sell and we can afford the payments, so the upside-downness is really of no concern, however.

|10.17.08 @ 11:08AM|#

I'm close to upside-down, and we put down 20%. We'll see where things go from here.

But all of that 20% was accumulated by buying and selling twice during the good times, and I'm not going anywhere for a decade or more. And thanks to some really effective urban planning and redevelopment policies, Lowell's real estate market is on a nice longterm trajectory.

No harm, no foul.

Chuck|10.17.08 @ 12:12PM|#

According to a recent article in our local fishwrap: "Among people who bought within the past five years, 46 percent are underwater on their mortgage in Lee [County, FL], compared with 29 percent nationwide, according to Zillow.com."

I am too lazy to go check Zillow.com.

|10.17.08 @ 12:24PM|#

That's especially bad news, Chuck, since Zillow is both optimistic about property values and a lagging indicator.

|10.17.08 @ 1:00PM|#

Republicans didn't nominate McCain. Democrats and independents in open primary states did.

Of course, if it hadn't been for open primaries, Huckabee probably would have gotten the nom, so not much better on the sanity issue.

|10.17.08 @ 1:02PM|#

And thanks to some really effective urban planning and redevelopment policies, Lowell's real estate market is on a nice longterm trajectory.

Not as good a trajectory as it would have been if you let the free market do it.

Chuck|10.17.08 @ 1:39PM|#

Dr. K--

That's interesting. I don't claim to know anything about Zillow; I just happened to read the newspaper article a few days ago and this thread reminded me of it.

In my own case, I am doing OK, since I bought my house way back in 1994. I did refi a few years ago, but most of the $$ I cashed out got plowed back into improvements to the house (yes, I do enjoy my pool and spa, thank you), so I still have some positive equity even after all this craziness.

Salvius|10.17.08 @ 1:40PM|#

Or else,the banks are going to have no choice but to stop loaning dollars and start loaning foreclosed houses.

That's it! We can solve our fiat-money problems, not by returning to the gold standard, but rather by adopting the house standard to back up our currency!

Added bonus: Moving all those foreclosed houses into storage in Fort Knox will create thousands of jobs! It's a win-win!

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