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Paul Kiesel
Paul Kiesel
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The Second Presidential Debate and the Mortgage Crisis

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The beginning of last night’s Presidential Debate focused on the economy, naturally. Both candidates laid out their plans for how they would "fix" the economic woes many Americans face and will continue to face in the coming months. Focusing on one of the more important economic issues, the mortgage crisis (and credit crunch), both candidates expressed what they’d do to mitigate the problem, however, John McCain mentioned a form of mortgage relief that already exists, as if he came up with the plan just a few nights ago.

McCain discussed a plan to buy up troubled mortgages; a plan that was part of the bill signed into law by President Bush last week after Congress passed the $700 billion "Rescue Package."

McCain said he would "buy up the bad home loan mortgages in America and renegotiate [. . .] at the diminished value of those homes, and let people be able to make those payments and stay in their homes."

But he prefaced that statement by saying, "We’ve got to give some trust and confidence back to America. I know how to do that, my friends, and it’s my proposal. It’s not Senator Obama’s proposal. It’s not President Bush’s proposal." That statement is false.

Senators Barack Obama and Joe Biden have both echoed similar plans (and Biden revealed how porous John McCain’s bailout proposal was just two weeks ago), as Biden, in his only debate appearance last Thursday, said Barack and he support "allowing bankruptcy courts to be able to re-adjust not just the interest rate you’re paying on your mortgage to be able to stay in your home, but be able to adjust the principal that you owe, the principal that you owe." That’s exactly the same plan McCain proposed last night, just with the government doing it directly. Either plan would require the government’s involvement at this point in time.

Biden said earlier in the debate: "Two years ago Barack Obama warned about the sub prime mortgage crisis. John McCain said shortly after that in December he was surprised there was a sub prime mortgage problem. John McCain, while Barack Obama was warning about what we had to do, was literally giving an interview to "The Wall Street Journal" saying that I’m always for cutting regulations. We let Wall Street run wild. John McCain and he’s a good man, but John McCain thought the answer is that tried and true Republican response, deregulate, deregulate."

As I pointed out over the past six months, McCain has drastically switched his position recently on the mortgage crisis, even though the facts surrounding it and how we got into it have been apparent for well over a year now, if not two years. His most recent take, buying $300 billion worth of troubled mortgages, isn’t a terrible idea, but it’s an idea that’s part of the current bailout package under Sec. 110.

Section 110. Assistance to Homeowners (and Section 109) states that the FHA, as the Federal property manager, "shall implement a plan that seeks to maximize assistance for homeowners and use its authority to encourage the servicers of the underlying mortgages, and considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures."

The Hope for Homeowners Program sounds very similar to McCain’s plan (that was first mentioned last night), which he dubbed the "Homeownership Resurgence Plan." But also, McCain’s plan over simplifies the larger problems that prevent a broad remedy for troubled homeowners. McCain’s plan fails to address the complications of securitization, through which investors buy bundles of loans. The current system is not structured for servicers to distinguish and modify individual mortgages from other securitized loans, an issue overlooked by McCain’s move for the government to buy mortgages directly from servicers. That’s why Sec. 110 states that the Treasury Secretary must encourage the sevicers to take a loss on the loan before its modified by a bankruptcy court, the government, or the servicer.

The fundamentals of McCain’s plan to attack the mortgage crisis are fundamentally weak and myopic; however, it shouldn’t be much of a surprise as he has stated that, "The issue of economics is not something I’ve understood as well as I should."