McCain's Housing "Solution": A Gift from Taxpayers to Banks

Jared Bernstein and Gene Sperling:

Jared Bernstein and Gene Sperling: Ouch! McCain's Housing Solution Is a Gift from Taxpayers to Banks: When John McCain announced his "new" plan to address the financial crisis by having the government directly buy up troubled mortgages, our first response was "wait a minute... that's already in the bailout bill." And... as outside economic advisors to the Obama-Biden campaign, we were also aware that his type of effort to restructure mortgages to help keep families in their homes had been something Senator Obama had been calling for since March. Thus our initial conclusion was that this proposal was a rather non-consequential ploy by McCain to provide cover for the fact that he has tended to be either late, on the wrong side, or frenetic and all over the map on policy responses to our current financial crisis.

But today we learned of a detail that makes his plan significantly different -- and much worse. The McCain plan uses taxpayer dollars to buy distressed mortgages at their full, face value from the banks and lending institutions that are currently stuck with them. Only then, after we the taxpayers have fully absorbed the cost to the lender of these troubled loans, does the homeowner get the benefit of the lower principal. That's right folks...it's private profits and social losses... this plan takes from taxpayers to provide unjustifiable subsidies to financial institutions - even those who engaged in deceptive or outright fraudulent practices to induce people into homes they could not afford.... [The] "Resurgence Homeownership Plan"... just write[s] checks to financial institutions and hope it trickles back to the rest of us.

And Jason Furman:

In Tuesday night’s debate Senator McCain announced what he said was a new mortgage proposal. As Fox News said “McCain seeks game-changer with housing policy.” Senator McCain insisted “it’s my proposal, it’s not Senator Obama’s proposal, it’s not President Bush's proposal.” But that night the campaign released a document proving that the plan was not in fact new, and was in fact what was happening under current law – both under the Dodd-Frank legislation passed over the summer (which McCain had originally opposed) and the financial rescue package (because Senator Obama and others insisted that it allow the Secretary to buy whole mortgages and require the Secretary to restructure mortgages, see Sections 3(9)A, 103, and 109).

On Wednesday, however, the McCain campaign did come up with a genuinely new proposal. They altered their website deleting from their plan the phrase “lenders in these cases must recognize the loss that they’ve already suffered.” Instead, as the McCain campaign explained, they would buy the mortgages from banks at “face value”. (You can read about how McCain changed his plan in this Politico story.) As all of you know, this turns the proposal from a restatement of current law into a massive transfer to financial institutions – with the biggest transfers to the least responsible institutions. Taxpayers would have a guaranteed loss upfront, share none of the upside, and continue to get even more downside risk. As Alan Blinder, the leading expert on these types of proposals said, the McCain plan is “wildly generous to the banks.” You can also read analysis by Jared Bernstein and Gene Sperling or Brad DeLong.

This morning the campaign is up on the air with a new ad on the McCain Bailout plan you can watch HERE.

And, finally, here is the statement the campaign issued – from me – yesterday:

Senator McCain’s first response to this economic crisis was to say that the fundamentals of our economy are strong. Since then, he’s acknowledged that there is a crisis and offered multiple plans, sometimes conflicting. Last night, in his latest attempt to get it right, he threw out a proposal that appeared to give the Treasury authority it already has to re-structure troubled mortgages. But 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. 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.

Since this beginning of this crisis, Barack Obama has demanded that any rescue plan must protect taxpayers and ensure that they share in any profit once the economy recovers, and he worked to include that principle in the plan that passed Congress. John McCain’s plan to overpay for bad mortgages by handing taxpayer dollars over to big financial institutions is erratic policy-making at its worst, and it’s not the change we need to strengthen our economy, create new jobs, and keep Americans in their homes.