Mortgages and Elections: Update
McCain Does a 180-degree Shift on the Housing Market
McCain now believes that the real estate market needs assistance. While his plan only provides up to $10 billion, it hits key areas of the mortgage market.
In a matter of weeks, John McCain has changed his stance on housing. For voters, it means bi-partisan support for homeowners and a stronger government hand in the housing market correction. While not jumping in at the $70 plus billion range of Clinton and Obama, his $3-$10 billion plan does offer support in key areas.
John McCain’s New Housing Plan
McCain’s plan calls for the government to guarantee new mortgages for homeowners at risk of foreclosure. Unlike other plans, the homeowner would apply for this plan, ensuring that the government gets a good mix of loans, avoiding a process where banks only turn over bad loans. This plan only applies to homeowners whose house is worth less than their mortgage. After the homeowner applies, the bank agrees to forgive the portion of the loan that is underwater and the government then guarantees the rest.
Mortgage Plan Pros
This plan is a win for banks, who get to limit their downside risk by off-loading their loans to the government. The homeowner wins because they get a fresh start with their home and a government-backed loan with a lower interest rate. Additionally, this plan should have minimal cost to the taxpayers because the government will be receiving assets in the form of a home or monthly payments. Certainly there will be some default to these loans, but the overall cost will be significantly lower than the other two plans.
A welcome change to the hands-off approach, McCain’s new plan should help the mortgage market most. By taking bad loans off the books of ailing banks, they will have more money to lend. Additionally, this will be a nice complement to the current legislation that has increased the maximum conforming loan limit.
Mortgage Plan Cons
The big question is will this be enough? With consumers becoming even more pessimistic about the housing market, it is becoming evident that the current housing slump will endure. Although this plan will allow banks to get bad loans off their books and lend more, banks have still increased regulations and consumers are still very gun shy in housing.
In the end it does not seem like this will be enough to help the real estate market and to help all homeowners. At best, a few people facing foreclosure could face relief, but many currently in foreclosure or not able to qualify for this plan will be left out in the cold. For those homeowners whose home has retained some value still could face foreclosure with this plan. As real estate continues to get worse, this plan would only be a pebble in an ocean.
