John McIlwain, chairman at the Center for Housing Policy and senior resident fellow at the Urban Land Institute, analyzes McCain's "Housing Resurgence Plan" in his most recent blog entry.
Senator John McCain’s campaign has just released a new plan intended to help the faltering
“There are 3.1 million homeowners in
“There are 11.8 million underwater first mortgages in the
The Resurgence Plan is an effort to resolve this unprecedented level of mortgage delinquencies in the
While not the first plan to deal with mortgage defaults, it could be the most comprehensive and is worth a close look although important details have yet to be set out. Other plans now in place include the following:
- The voluntary HOPE Now program where lenders voluntarily agree to modify mortgages in default was set up in July, 2007. It recently announced that it has helped 2.3 million homeowners avoid foreclosure.
- Fannie Mae and Freddie Mac, now under government conservatorship, are authorizing modifications on mortgages they own.
- FHA’s new HOPE for Homeowners program, authorized this summer by the Housing and Economic Recover Act (HELA), also voluntary on the part of banks, is just now going into operation.
- Recently, the Bank of America agreed to a $8.7 billion deal with Jerry Brown and other state Attorneys General to modify mortgages in default made by Countrywide.
- Finally, the Treasury received authority in the Emergency Economic Stabilization Act (“EESA”) to modify mortgages it acquires; it is now in the process of developing rules for how this will be done.
The basics of the Resurgence Plan appear simple:
“The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes. …
“The McCain resurgence plan would be available to mortgage holders that:
· Live in the home (primary residence only)
· Can prove their creditworthiness at the time of the original loan (no falsifications and provided a down payment).
“The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner.”
Simple and straightforward as this is, there are still questions that need to be resolved, some of which are as follows:
- Are refinance loans to be excluded? Is the requirement that homeowners have made a down payment at the time the loans were originally made intended to exclude refinances?
- Who would be the sellers? Saying that the federal government “…would purchase mortgages directly from homeowners and mortgage servicers…” is presumably an error as neither owns mortgages. The mortgages in question are in fact held either by a financial institution (e.g., a bank, an insurance company, a pension plan, or even Fannie Mae and Freddie Mac), or by a trust established to back an issue of mortgage-backed securities (“MBSs”). Thus the government would have to buy the mortgages from them, not the homeowners. The Plan is silent on whether lenders would be required to sell mortgages (mandatory participation would be unlike the other plans); if participation in the plan is to be voluntary, the willingness of lenders to participate would depend largely on the price to be paid by the government.
Alternatively, the plan may contemplate not the purchase of mortgages from a bank or trust, but instead working directly with homeowners. For instance, the government might directly offer qualified homeowners sufficient funds to enable them to fully pre-pay their existing mortgages (including the amount of any pre-payment penalties). This would be the same as buying loans at par, i.e., 100 cents on the dollar.
- At what price would mortgages be purchased? Assuming mortgages are to be purchased, the issue of price is important to the cost of the program to the taxpayer and to the willingness of lenders to participate, assuming the program is voluntary. The Plan says only that the Secretary of the Treasury would be instructed to use “…the authorities provided in the stabilization bill, the recent housing bill, and the
government's conservatorship of Fannie Mae and Freddie Mac…” to purchase mortgages. U.S.
Generally, EESA (“the stabilization bill”) requires the Secretary to purchase mortgages for no more than “the underlying value of the asset.” Under FHA’s HOPE for Homeowners program, authorized by HELA (“the recent housing bill”) “…lenders will be encouraged to write-down the outstanding mortgage principal balances to 90 percent of the new value of the property.” On the other hand, the FHFA presumably could instruct Fannie Mae and Freddie Mac to purchase defaulted mortgages at par.
Thus the Resurgence Plan either is quite similar to existing plans in that it proposes to invite lenders and other holders of mortgages to voluntarily sell mortgages for some negotiated price reflecting the value of the loan, or it is quite different in that participation in the program would be mandatory on the part of lenders, and/or the price the government would pay would be above the loans current value (which might require additional legislative authority).
If the Resurgence Plan proposes to pay above current value, lenders would avoid or significantly reduce their losses. This raises the issue of moral hazard, namely, should taxpayer funds be used to spare banks and holders of MBSs economic loss on bad investments they made and would this encourage future loose lending by banks and others.
- Who are eligible homeowners? The information on the plan says eligible homeowners are those who live in the home and who, when they originally took out the loan, had good credit and made a down payment. Oddly, the Resurgence Plan is silent on whether the loan must be in default. In fact, the example used in the release on October 14th makes no mention of the loan being in default, perhaps suggesting that underwater loans need not be:
“How The Program Works:
“An American buys a house that is his or her primary residence for $250,000 with a conservative, 20 percent downpayment ($50,000 down).
“His or her community property values fall by 30 percent, leaving him or her with a home worth $175,000 and a mortgage still worth $200,000.
“Under the McCain Plan, their mortgage would be retired, and they would receive a new, FHA guaranteed, 30-year fixed mortgage, at a low interest rate that reflects historical norms and the current market value of his home.”
This raises certain questions.
- Should all homeowners in default be bailed out, regardless of why they took out a mortgage they can no longer afford (loss of a job, a bad bet on the housing markets, speculation, or being flim flamed by an unscrupulous mortgage broker)?
- Would the plan cover only mortgages currently in default? If so, millions of homeowners with future loan defaults would not be protected. If not, and future loans in default would be eligible, would the plan encourage homeowners to default in the future?
- If the plan intends to cover homeowners whose loans are not in default but whose loans are now (or in the future become) underwater, is that fair to neighbors whose homes also lost value but who took out smaller loans that are not underwater?
- Would the plan be good for the homeowners and the economy? The Resurgence Plan would, like the other plans currently in place, help homeowners avoid foreclosure. If the idea is for the Plan to pay lenders and others more than the current loan value, then it might be of great benefit to financial institutions and other holders of MBSs around the world. Recognizing that it would take years to complete as the eligibility of each homeowner and the amount of their new FHA mortgage would have to be determined, the Resurgence Plan nevertheless could have a substantial, positive impact on the
economy in time. For example, it should: U.S.
- Along with the other plans, help foreclosures that are one of the major drags on home values, especially in neighborhoods with high foreclosure rates;
- Support the capital base of banks holding these mortgages in portfolio, and
- Support the value of the MBSs and their derivatives (a stated goal of the plan) and avoid further write-downs by banks, hedge funds, and other holders of MBSs around the world.
So is the McCain plan a bold step forward, and if so, one in the right direction? The answers to these questions will have to await further details from the campaign. Based on information released to date, it could be anything from an extraordinary and politically controversial proposal to a repackaging of current plans. Given its potential, it’s important for enough details to be released soon so it can be assessed fairly.