In a debate that featured rehashed candidate positions, one new policy emerged: Sen. John McCain's proposal to have the government buy and renegotiate "literally millions" of mortgages on houses whose values have dropped and whose owners are struggling to keep up with payments.
Taxpayers would cover the difference between the original loan and the new one, at a cost the McCain campaign estimated Wednesday to be at $300-billion.
"Is it expensive? Yes," McCain said during the Tuesday night debate. "But we all know, my friends, until we stabilize home values in America, we're never going to start turning around and creating jobs and fixing our economy. And we've got to give some trust and confidence back to America."
While at least part of the expense of McCain's plan would be borne by the recently approved $700-billion bailout plan, the initiative also would tap some of the $300-billion tied to the Housing and Economic Recovery Act passed this summer. That's a plan that seeks to refinance loans for low- to moderate-income homeowners struggling to pay for homes they bought for more than they are now worth.
"Mechanically, the initiative is very simple," said Doug Holtz-Eakin, senior policy adviser for the McCain campaign. "A homeowner would initiate the process by calling a mortgage broker or other originator and basically saying, 'I'd like to refinance my home,' and they would start the underwriting process, verify incomes."
The government loans would be available to mortgage holders who:
• Live in the home as a primary residence.
• Can prove their creditworthiness (and made a down payment at the time of the purchase).
The FHA would then issue a 30-year fixed rate mortgage at a rate Holtz-Eakin estimated would be "in the low 5 percent" range. Mortgage rates for 30-year fixed home loans are currently about 5.82 percent.
Taxpayers would pick up the difference between the value of the two loans.
"Sen. McCain believes this is exactly the right kind of policy to give direct help to homeowners, at the same time support the financial markets and keep them from further damaging the availability of credit to Main Street America, one of the real threats to the economy at this time," Holtz-Eakin said.
The McCain plan outlines a dramatic shift in emphasis for the $700-billion bailout plan. While the plan contained provisions to allow the Treasury to purchase mortgages directly, the plan was primarily intended as a means for the government to buy troubled assets from financial institutions that might otherwise fail and that could later be sold when the markets recover.
The hope, said Holtz-Eakin, is that McCain's "bottom level up" plan will offset the need for some of that $700-billion.
When McCain announced the plan on Tuesday night, Obama supporters were quick to note that Obama had in previous weeks recommended that the bailout plan include the option of buying individual mortgages. "We can't simply bail out Wall Street without helping the millions of innocent homeowners who are facing foreclosure — or, for that matter, are seeing their home values decline," Obama said.
At the debate on Tuesday, McCain was quick to claim credit for the initiative. "And it's my proposal, it's not Sen. Obama's proposal, it's not President Bush's proposal," McCain said.
After hearing details Wednesday, the Obama campaign agreed.
Obama has always supported plans to have the government buy loans at market prices (in other words, the companies would have to swallow some loss), said Obama campaign economic policy director Jason Furman. And homeowners would have to share some of the profits should the value of the home rise.
"Now that he's finally released the details of his plan, it turns out it's even more costly and out-of-touch than we ever imagined," Furman said. "John McCain wants the government to massively overpay for mortgages in a plan that would guarantee taxpayers lose money and put them at risk of losing even more if home values don't recover. The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud."
Charlie Black, a senior adviser to McCain, told the New York Times the mortgage renewal idea actually originated with Sen. Hillary Rodham Clinton, who borrowed it from a Depression-era New Deal agency, the Home Owner's Loan Corp.
Some of McCain's opponents called the initiative a desperate campaign stunt by a candidate who's popularity in polls is dropping largely due to people concerned about the economy. The plan is likely to be a tough sell to McCain's conservative base, many of whom are uncomfortable with the whole bailout plan to begin with.
"It creates a big moral hazard," said Daniel Mitchell, a senior fellow at the Cato Institute, a libertarian think tank. "If I thought McCain was going to be elected, I'd stop paying my mortgage now and stick my nose in the trough."