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John McCain, real-estate magnate

October 8, 2008 |  5:15 pm

Had I been in Tom Brokaw's spot for Tuesday night's debate (see my colleague Mike McGough's post on Brokaw's eccentric moderating style), I hope I would have found a way to let John McCain elaborate on his breathtaking proposal to have the feds buy up troubled mortgages. I say "breathtaking" because it's a very big idea that seemed to come out of nowhere. It's also political dynamite, and it's not clear to me who might be hurt by the explosion.

A more emotional candidate than Obama, McCain has done a better job recognizing and reflecting the grass-roots anger generated by the $700 billion rescue plan for the financial industry. By proposing to spend about $300 billion of that to buy defaulting borrowers' mortgages, McCain is essentially saying, "Let's devote part of the bailout to average Americans, not greedy Wall Street fat cats." But the concept of direct aid to homeowners poses a moral hazard, too. And judging from the comments on my colleague Peter Viles' L.A. Land blog, the prospect of helping reckless borrowers goes over just about as well with the grass roots as helping reckless lenders. Every working- and middle-class homeowner with a mortgage in good standing knows how much they have to sacrifice to stay current on their payments. They remember how long they squirreled away money for a downpayment, and they may still drive by the homes they wanted to buy but couldn't afford. They know how much they could lose if they're forced to sell while the market's tanking. To these people, giving the least responsible borrowers free equity and forgiving thousands of dollars in interest and/or debt is absolutely galling.

Depending on the details (few of which were available today), McCain's approach could reward lenders and investors even more than borrowers. If the government bought distressed mortgages at face value, it would essentially relieve lenders and investors of their responsiblity for making or buying loans that were too risky. Taxpayers would be left to cover any and all losses from defaults and short sales. Taxpayers would also have to cover the difference in value between the loans the government buys and the more affordable, fixed-rate mortgages it issues to keep borrowers in their homes.

Nevertheless, the idea of direct buyouts is worth exploring because it attacks the financial industry's problems at their core -- defaulting mortgages -- instead of one or two levels removed. To make sure lenders absorb some of the cost of their mistakes, the government could buy mortgages at a discount to reflect the properties' reduced value. And to limit the benefit to borrowers, the feds could demand all or part of any gain in the house's value when it's sold. Alternatively, it might limit the buyouts to grossly overbuilt neighborhoods, then level the houses, as Wall Street Journal columnist Holman W. Jenkins Jr. has advocated.

It's also worth remembering that a hard-to-estimate but non-trivial portion of the borrowers in default were misled or defrauded by mortgage brokers or lenders -- witness the recently settled lawsuit against Countrywide Financial. Granted, there are plenty of not-so-innocent victims who would certainly benefit from McCain's plan, along with lenders and investors. And homeowners and renters who wouldn't qualify for aid because they didn't get in over their heads would justifiably resent that. I have two things to say to that group: Suckers! Er, I mean, thanks for being so responsible. And let's face it: the credit crunch that's grown out of the subprime fiasco is damaging the economy for everyone. If a rescue plan helps some reckless or clueless risk-takers en route to averting a financial catastrophe, I'm willing to pay that price. The question is how best to pull off that rescue, not whether to do it.

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