Experts skeptical about McCain mortgage plan

updated 6:15 p.m. ET Oct. 8, 2008

WASHINGTON - Ordering the government to buy up bad mortgages to cut homeowners' monthly payments might sound good, but experts are skeptical. They say the plan John McCain is promoting is unlikely to solve the housing crisis that's pushing the economy toward recession.

One big problem: The vast majority of the toxic home loans that are clogging financial markets and freezing up credit have been sliced, diced and repackaged into complex investments that the government would be hard-pressed to unravel and buy.

Even if the government did gain access to the mortgages, it would have to pay far more than they would ever be worth, housing specialists said Wednesday. That would effectively bail out banks and lenders with taxpayer money to a greater degree than Congress and the Bush administration are already doing through the $700 billion financial industry rescue enacted last week.

"The mortgages that are causing this credit freeze are generally mortgages that aren't available for purchase," said Alan M. White, Valparaiso University specialist in consumer law.

"It's not quite as easy as the McCain campaign thinks it is," said Andrew Jakabovics of the Center for American Progress.

Republican McCain is pushing his American Homeownership Resurgence Plan as he works to burnish his credentials on the economy, an issue that has helped Democratic rival Barack Obama pull ahead in the presidential race as the national financial crisis has worsened.

With foreclosures on the rise — particularly in election battleground states like Indiana, Florida, Michigan and Ohio — and many Americans seething about the huge rescue package for financial institutions, McCain argues his plan would provide direct help to struggling homeowners.

He declared in Tuesday night's debate that he would order his Treasury secretary to buy up bad mortgages and let struggling homeowners refinance into more affordable loans — a power the government already has under the new financial industry bailout law.

Under McCain's plan, the government would spend $300 billion to purchase distressed loans and provide new, fixed-rate mortgages. Douglas Holtz-Eakin, the Arizona senator's economic adviser, said the plan would help stabilize the plunging values of mortgage-backed securities that are at the heart of the crisis in the financial markets.

To do so, the government would pay the full face-value of the distressed mortgages, Holtz-Eakin said.

Under that scenario, the government could buy a $200,000 subprime mortgage on a home now worth just $100,000, give the homeowner a 30-year, $90,000 loan with a 5 percent interest rate, and essentially eat the $110,000 difference.

"It's the only way to do it in a timely fashion," Holtz-Eakin said.

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Obama's campaign said right after the debate that he had made similar proposals to McCain's and there was nothing new in the Republican's remarks. But as McCain aides offered more details on Wednesday, the Obama camp changed its tune.

The plan would cause 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," said Obama economic adviser Jason Furman. "The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud."

Indeed, analysts on the right and left said the plan would let banks and investors who bet heavily on the risky mortgages walk away with a handsome payout courtesy of U.S. taxpayers.

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