TO: Interested Parties
FR: Jason Furman, Obama-Biden Economic Policy Director
RE: The Facts on McCain’s Plan to Reward Lenders at Taxpayer Expense
In light of the McCain campaign’s latest erratic move on the economy, see below for details on Senator McCain’s plan to reward irresponsible mortgage lenders at taxpayer expense. In the course of twelve hours, McCain transformed a “new” mortgage plan which was simply restating a policy the government had already authorized into what is possibly the largest taxpayer funded handout to irresponsible lenders in U.S. history. In short, this plan guarantees taxpayers lose money, rewards bad behavior in the past and discourages responsible behavior in the future.
· Tuesday Night: McCain announces “plan” which restates current law. On Tuesday night, the McCain Campaign released a plan to “purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes.” As Senator McCain said, “it’s my proposal, it’s not Sen. Obama’s proposal, it’s not President Bush’s proposal.” But he was wrong: the Treasury Department and Federal Housing Administration already have the authority to purchase, restructure and guarantee mortgages for struggling families. McCain’s plan appeared to simply restate these authorities, which Barack Obama had previously fought for and supported when they were included in legislation.
o Importantly, the plan McCain released on Tuesday night required lenders to take a “haircut.” McCain’s plan on Tuesday night explained that in circumstances when loans were purchased and restructured by the government “[l]enders in these cases must recognize the loss that they’ve already suffered.” This approach was not new – it reflected the shared responsibility approach embodied in the Dodd/Frank housing legislation which forced current lenders to sacrifice by backing mortgages for only 90% of current market value. Also, borrowers who benefit from the program share any upside in their house price with the government.
· Wednesday Morning: McCain announces a new plan – financial institutions no longer have to take any losses and the McCain Bailout guarantees that taxpayers lose money, rewarding the most irresponsible lenders. Overnight, the McCain campaign changed their plan and eliminated this reference to shared responsibility for lenders from the plan on their website, deleting from their plan the phrase “Lenders in these cases must recognize the loss that they’ve already suffered.” Top McCain advisor Douglas Holtz-Eakin explained that, rather than asking lenders to take a haircut, the McCain plan called on the government to purchase mortgages at their full face value. This approach would reward irresponsible banks with taxpayers’ money and would give no upside to the government. (Details on how McCain changed his plan are HERE .
o Rewarding Irresponsible Banks. If a homeowner has a mortgage of $200,000 on a house now worth $150,000, the McCain plan would pay off the original lender at the full $200,000 price. His plan would not insist on any sharing of sacrifice by the lender. Indeed, if the original lender engaged in fraud to inflate the size of the initial mortgage, they would be explicitly rewarded for it under the new McCain plan since they would be paid back the full, inflated value of the mortgage.
o Guaranteeing a Taxpayer Loss. The McCain plan will stick taxpayers with the full loss on houses and put them at risk of losing even more if home values don’t recover. It would do so without asking anything of the lenders themselves and without giving the taxpayers share in any future upside should house prices recover. It is a recipe for the worst kind of bailout abuse.
o Inhibiting Private Solutions to the Problem That Do Not Cost Taxpayers a Dime: Today some lenders, voluntarily or as part of settlements, are working on solutions to the mortgage mess that involve the financial institution modifying mortgages to help homeowners stay in their homes – without costing taxpayers a dime. But if the McCain plan were in place, this process would stop because lenders would know they could always sell their mortgages at full face value to taxpayers.