McCain's plan to overpay mortgage lenders

Let taxpayers take the hit, while lenders get a big break

Published October 8, 2008 7:38PM (EDT)

The McCain mortgage bailout mystery thickens. Even though a good case can be made that the plan is a repackaging of earlier Democratic efforts to get aid to homeowners, the Obama campaign is opposing it:

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.

The Obama campaign response tacks very closely to a denunciation of the plan delivered by economist Brad DeLong who says that "McCain's plan is for the government to buy up $300 billion of distressed mortgages not at current market value but at full face value," which, he says, would amount to a $100 billion handout to the bankers who made the original loans.

DeLong's interpretation is based on an explanation of the plan provided by McCain economic advisor Douglas Holtz-Eakin during a conference call Wednesday morning. I e-mailed a copy of the transcript to Alan Levitin, the Georgetown University bankruptcy and commercial expert whose views on the plan I wrote about earlier today.

Levitin had originally assumed that McCain's plan involved some sort of write-down of the value of the mortgage loans to reflect depressed home values. But after reviewing Holtz-Eakin's comments, Levitin told me that it sounded as if the plan did indeed involve the government paying "face value" to the lenders for the mortgages. While this would allow the government to get around the securitization problem he had warned about, there's a big catch -- "if someone is underwater, where they have negative equity in their home, and you refinance them at a 100 cents on a dollar, you are way overpaying."

The McCain mortgage plan -- perhaps not unworkable, but definitely high-priced, with taxpayers taking the hit, while lenders get off easy.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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