Below The Beltway

The McCain campaign released more information yesterday about John McCain’s suggestion that the Federal Government buy up and refinance distressed mortgages:

WASHINGTON — The homeowner assistance plan that Senator John McCain announced without detail in the presidential debate Tuesday night would allow millions of financially stretched Americans to refinance their mortgages with government help, but it would leave taxpayers to cover the losses, rather than the financial institutions that hold the original mortgages.

Mr. McCain said in the debate that the program would be expensive, and on Wednesday his chief economic adviser, Douglas Holtz-Eakin, acknowledged that the liability would be borne directly by taxpayers.

Mr. McCain, who has made cutting government spending a centerpiece of his campaign, justified the costs on Tuesday night by saying that “until we stabilize home values in America, we’re never going to start turning around and creating jobs and fixing our economy.”

As Mr. Holtz-Eakin described it, the proposal would ensure that homeowners got direct and speedier help to stay in their residences before they faced foreclosure, so that Wall Street and financial institutions would not be the only direct beneficiaries of government aid. The new loans would be 30-year mortgages at fixed interest rates of just over 5 percent, he said. The McCain campaign did not make clear what level of financial strain an applicant would have to show to qualify for the program.

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Mr. Holtz-Eakin suggested that “the taxpayers’ contribution” would be the price of getting the quickest possible relief to homeowners and arresting falling home values. Declining home values have led to rising defaults and foreclosures, which in turn have devalued trillions of dollars in housing-related assets for financial institutions and companies in the United States and abroad, threatening the businesses’ survival and fueling a credit freeze that endangers the global economy.

And the pain to taxpayers will be made greater thanks to McCain’s suggestion that the mortgages be bought a face-value:

Alan Blinder, a former vice chairman of the Board of Governors of the Federal Reserve, said he and others have supported the government buying loans at a discount and then restructuring them. But buying them at face value is a dramatic departure, he said.

It is “outright loss for the taxpayer,” said Blinder, an Obama supporter who said he has answered queries from the Obama campaign. “I don’t see why anybody, Republican or Democrat, would want to do that. Ironically, you would be giving the biggest gifts to the lenders who made the worst mortgages.”

The losses will grow if home values continue to drop, said Abdullah Yavas, a real estate professor at Penn State University.

“The more the property value goes down, the bigger that loss will be,” said Yavas, who is not affiliated with either campaign.

And the cost is likely to be more than what McCain said it would be:

Chris Mayer, a real estate professor at Columbia University, said $300 billion won’t be enough to achieve McCain’s goals.

“There’s over $400 billion in negative equity sitting around the country right now and $300 billion is not going to come close to the magnitude of solving the problem,” he said.

And, he said, it won’t help potential buyers who can’t find a loan because credit has dried up.

John McIlwain, a senior fellow for housing at the Urban Land Institute, said that reworking these loans might be the fastest solution to the housing crisis. “But it was not something I expected to hear from a conservative Republican.”

That would be because John McCain is not a conservative Republican.