- The Washington Times - Thursday, October 9, 2008

Sen. John McCain’s $300 billion plan to buy up all bad home mortgages and refinance them at a lower fixed rate came under fire Wednesday from economists on the left and the right who said his idea was a redundant, unworkable, costly scheme that would plunge taxpayers deeper into debt.

Mr. McCain raised the idea in Tuesday night’s presidential debate with Sen. Barack Obama, hoping it would be a game-changing plan that would turn his lagging campaign around.

But his rival’s chief economist attacked the proposal as “erratic policy-making at its worst” that would not strengthen the economy, create jobs or keep Americans in their homes.

“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,” said Jason Furman, director of economic policy for Mr. Obama.

In its defense, Mr. McCain’s chief economic adviser, Douglas Holtz-Eakin, said the plan would help stabilize the economy by refinancing all existing subprime home mortgages that led to the banking credit crisis, which has sent stock markets here and abroad into a nose dive and pushed the economy closer to a recession.

“Goal No. 1 is to provide direct help to struggling homeowners, making sure they can stay in their homes with a manageable mortgage, avoid foreclosures and the damaging impact that has on neighborhoods and property values in that area,” Mr. Holtz-Eakin said in a conference call with reporters.

“It would also, in the process of refinancing, help them with their financial situation, and as a result, give some stability to the household spending in the overall economy,” he said.

Under the plan, the Federal Housing Authority would issue a guaranteed 30-year fixed-rate “at a manageable interest rate,” Mr. Holtz-Eakin said. “The homeowner would stay in the home, their financial burden would be relieved, the valuation of the existing loan would be resolved, there would no longer be a threat of default or diminished capacity to repay. That would stabilize financial markets.”

He acknowledged all this would come at a sizeable cost to taxpayers, but that the appropriate government agencies already have the authorization to pay for it.

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“The initiative would rely on authorities that have been provided [with financing] in recent months by Congress. There’s $300 billion worth of refinance capacity at the FHA at this point. That can be combined with the statutory capacity at Fannie Mae and Freddie Mac” and the $700 billion Congress authorized for the economic-rescue package enacted last week, he said.

Still, the plan came under considerable criticism from conservative and liberal groups, who said it costs too much, wasn’t needed or would make matters worse.

Economist J.D. Foster at the conservative Heritage Foundation said the plan did nothing to deal with “the central problem, which is in the credit markets.”

“We need to let the markets work,” he said.

“It’s not clear this is needed, given the success of the Hope Now program, where the Treasury is aggressively renegotiating mortgages on the order of 200,000 mortgages a month,” Mr. Foster said.

Despite the fierce broadside against Mr. McCain’s plan by Mr. Obama’s economic adviser, a separate statement from the Illinois liberal said it was “critical that Treasury, in coordination with other government agencies, move as vigorously as possible to help homeowners stay in their homes.”

Dean Baker, co-director of the liberal Center for Economic and Policy Research, said that “it’s hard to see how it helps,” because it duplicates a Democratic refinancing plan Congress passed in July to help homeowners avoid foreclosure.

“There are some 15 million mortgages that are underwater. If McCain literally means to buy up every bad mortgage, then every person in that situation has an incentive to stop paying and say, ‘Let the government bail me out,’ ” Mr. Baker said.

“He wants the government to use $300 billion — which it doesn’t have — to buy bad mortgages in order to prop up housing prices. Yet, it was the artificial inflation of housing prices that got us into this mess in the first place,” said former Rep. Bob Barr of Georgia, now the Libertarian Party’s candidate for president.

Pointing to this summer’s $300 billion housing-bailout measure, which Mr. McCain supported, the takeover of mortgage giants Fannie Mae and Freddie Mac, and the $700 billion economic-rescue package enacted last week, Mr. Barr asked, “Where does Senator McCain believe all of this money is going to come from?”

The Arizona Republican’s proposal was drawn from a number of similar proposals from the left and the right that have been floated throughout the year. They included a plan by the Center for American Progress, a liberal Democratic advocacy group, and another by R. Glenn Hubbard, the former chairman of President Bush’s Council of Economic Advisers.

Mr. McCain’s refinancing Homeownership Resurgence Plan would be aimed at mortgage holders who live in the home as their primary residence and can prove they were creditworthy at the time they took out their original loan.

The proposal appears to closely follow the details of a plan Mr. Hubbard published last week in the Wall Street Journal that called for refinancing all troubled mortgages at a 30-year, 5.25 percent fixed rate.

“McCain is right to emphasize the problem of falling house prices. As I understand from what McCain has proposed, his action is entirely consistent with the plan in the Wall Street Journal,” Mr. Hubbard said in an e-mail to The Washington Times.

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