McCain's Mortgage Plan

Wonks Anonymous recalls a statement that someone or other once made about economic ideas: If it's good then it's probably not new and if it's new then it's probably not good. Wonks Anonymous believes that this statement pretty much captures McCain's mortgage relief plan just announced during Tuesday's debate. Which plan has two parts: a good part and an entirely new part.

The good part is the idea that the government should use at least part of the money that it will spend on the Big Bailout of 2008 to buy the mortgages of people who are facing foreclosures and restructure them. This good idea is not at all new. It appears in the Discussion Draft brought by Dodd and Frank way back at the beginning of this sorry episode in our history.

This good idea will, unfortunately, be rather difficult to implement. The Mortgages in question were most often pooled and then claims on the income from these pooled mortgages were sold as mortgage backed securities.  The securities had various levels of seniority. The most senior have the first claim on any income produced by the pool of mortgages and the owners of these securities also have the power to renegotiate mortgages in the pool. Less senior securities give the buyer the right to claim any income that is left after the senior claimants are satisfied.

Why or how the Wall Street technocrats manged to rate the less senior securities as anything but junk is still a mystery to Wonks Anonymous. He thinks that it has something to do with statistics.

Now, unless the treasury hires some pretty tough negotiators - see the previous post for Wonks Anonymous suggestion on this matter - it is not going to get a whole lot of the more senior securities but will buy up a lot of the junior junk. Unfortunately it will be hard to restructure anyone's mortgage with only the junk.

So what is new with McCain's proposal? I refer the reader to Brad DeLong's blog for details and quotes but here is the gist of it: McCain wants to use the $300 billion to buy bad mortgages at their face value. If the bank lent me $1.5 million to buy a house in Tracy then McCain will pay the bank $1.5 million. He will then turn around and renegotiate my mortgage at a reasonable interest rate and at the actual value of the house, say $500,000. The taxpayers will eat the difference.

You have probably already spotted the problem here and I daresay that you did not need to use your postgraduate or even undergraduate education to spot it.

People say that John McCain is good at foreign relations and that it makes up for his poor understanding of economics. I say that if he is this incapable of figuring out the most elementary concepts of business and economics it is hard to believe that he will be able to figure out international relations.


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  • 10/25/2008 8:27 AM Sher wrote:
    McCain's plan to have the government buy mortgages at face value and renegotiate them at a reasonable interest rate was not an error.

    I'd like him to explain why it is *necessary* for the government to pay face value. Does he believe he can end the crisis by paying full value for these mortgages? Will banks who receive this cash suddenly find themselves on solid ground? Will they start lending again? Of course not. This is a handout to bankers who gambled and lost.
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