Either a Borrower or a Lender Be

Under John McCain's mortgage plan, you'd better not be a taxpayer

John McCain calls his promise to help millions of Americans with their mortgages the McCain Resurgence Plan. Ostensibly, the "resurgence" has something to do with home values, but his poll numbers are what he really has in mind.

This desperate ploy, unveiled at last week's presidential debate, speaks volumes about McCain's readiness to forsake his avowed principles and his supposed commitment to candor. Meant to bribe swing voters with taxpayers' money, it should repel anyone who considers its rationale, its fairness, and its fiscal implications.

Responding to a debate question about the economic insecurity of "retired and older citizens and workers," McCain said: "Home values of retirees continue to decline, and people are no longer able to afford their mortgage payments. As president...I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate...at the diminished value of those homes and let people be able to make...those payments and stay in their homes."

McCain thus conflated two distinct issues: declining home values and foreclosures. If a home you bought for $300,000 can now fetch only $200,000, that in itself does not affect your ability to make your monthly payment. You may not like paying off a loan that's higher than the current market value of your house, but that's the chance you took when you invested in this particular asset.

If you used an adjustable-rate mortgage to buy the house and the rate has risen, you may now have difficulty making your payments. But that's the chance you took when you picked a lower initial rate over a higher but stable rate.

McCain says he would "buy up the bad home loan mortgages." Bad from whose perspective? Does he mean mortgages that exceed the current value of the homes they were used to buy (which are bad from the borrowers' perspective) or mortgages on which the homeowners have started to miss payments (which are also bad from the lenders' perspective)?

Since preventing foreclosures is one of McCain's aims, you might think he has the latter sort of loan in mind. But according to The New York Times, McCain's chief economic adviser "noted that about 10 million Americans had mortgages that exceeded their homes' value." He said "literally millions of people" could benefit from McCain's plan, adding, "The question is how many people pick up the phone."

That suggests anyone with negative equity would be eligible, regardless of his financial position or payment history. If so, a multimillionaire whose mansion is worth less than it was when he bought it could get a fixed-rate, 30-year mortgage at 5 percent, with the principal based on the home's current value.

That's better than my mortgage, and I bet it's better than yours (especially the part where you can reduce the principal you owe). Can you get in on this deal? Only if your purchase and/or financing decisions were particularly ill-advised.

Under McCain's plan, neither the borrowers nor the lenders bear the cost of their risky choices. Taxpayers do, to the tune of $300 billion or so—his estimate of the difference between what the government will pay to buy mortgages at their face value and what it will get back at the McCain-discounted value, assuming borrowers who have already shown themselves to be bad credit risks pay off their new loans.

McCain concedes his plan will be "expensive" but says it's necessary to "stabilize home values in America." Somehow McCain knows the market price for homes is not the correct price, so he plans to artificially prop up the value of these assets, benefiting one group of Americans at the expense of others. The straight-talking maverick thereby abandons any pretense of fiscal conservatism, devotion to free market principles, or opposition to pork barrel politics—all to restore "some trust and confidence back to America."

You know, I do feel a resurgence coming. But I think it's my breakfast.

© Copyright 2008 by Creators Syndicate Inc. This column first appeared at Reason.com.

Jacob Sullum is Senior Editor





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