Critics Call McCain Housing Plan 'half-baked'

John McCain’s surprise policy offering Tuesday night to have the government buy bad mortgages is bold, sweeping and, well, a bit perplexing to nearly everyone.

From economic experts to political pundits, from liberals to conservatives, the proposal has been greeted with a collective sense of puzzlement that is raising questions not only about the substance of the plan, but of the seeming hastiness surrounding its rollout.

The few details available about McCain’s American Homeownership Resurgence Plan give the impression the plan is “half-baked,” according to Larry Sabato, director of the University of Virginia’s Center for Politics.

“If you’re launching a major new initiative, usually you blitz the cable networks and really try to penetrate the public consciousness. I didn’t see that today,” he said Wednesday.

“It would really frighten me if he actually thought this was good policy,” said Dan Mitchell, a senior fellow at the libertarian Cato Institute. “I assume that it’s nothing but a desperation ploy” to show they are doing something “big and bold,” he said.

“It seems hastily put together … given the lack of detail, specificity and overlap with existing programs,” added a Republican financial services lobbyist.

Indeed, McCain’s announcement was accompanied by a fact sheet that raised almost as many questions as it answered. The campaign did post and e-mail a background document Tuesday night following the debate describing the plan, but it lacked specifics about how the program would work, exactly who would be eligible and how many people would be helped.

The ambiguity — and McCain’s failure to return to the subject and further elaborate on the initiative in the debate — afforded Democrats an opportunity to dismiss the plan right out of the gate.

Obama supporter Sen. Claire McCaskill (D-Mo.) told Fox News after the debate it felt “a little bit like another Hail Mary.”

The McCain campaign tweaked the document overnight Tuesday in a slight but very significant way, removing a single sentence that indicated the government would buy mortgages from lenders at a discounted rate.

The McCain campaign said the plan did not change and they merely edited out “language [that] was mistakenly included in the initial draft.”

Nonetheless, with the sentence gone, the plan morphed into a shifting of $300 billion worth of losses to the taxpayers. It became clear Wednesday as the campaign talked about the plan that McCain is proposing that the Treasury purchase bad mortgages at face value even though sliding home prices mean many homes are worth far less than what the government would pay for original mortgages.

The plan is to retire the original mortgage and issue the homeowner a new, 30-year fixed-rate loan at interest rates just above 5 percent from the Federal Housing Administration. The shortfall between the new mortgage and the cost of the older, more expensive one would come from taxpayers.

The new detail caused many experts to question whether the $300 billion price tag is too low.

And while the McCain campaign pitched the plan as a fast-acting solution, some experts said that the administration of a homeowner-by-homeowner program would be extremely complicated — and therefore likely slow-moving — and much more cumbersome than dealing with larger institutions.

A campaign conference call with reporters Wednesday morning revealed that the campaign still doesn’t have all the details worked out.

When asked how many people the plan would help, McCain economic adviser Douglas Holtz-Eakin responded that it could aid “literally millions” but they didn’t have a precise estimate. “The question is how many people are going to pick up the phone.”

Holtz-Eakin offered only broadest description of who would qualify for th refinancing program.

“They need to be in a position where they’re going to be unable to stay in the mortgage,” he told reporters, saying that includes a homeowner who is “underwater” in their mortgage — owing more than the home is currently worth — or facing a future rate reset that would make their payments unaffordable.

“We’re going to roll out the specific criteria. We’re trying to get sign-offs from the senator on all the details,” Holtz-Eakin told Politico in a later interview.

When asked when McCain decided to embrace this new housing initiative, Holtz-Eakin said the idea has been evolving since March.

“We’ve had different versions of our housing plan, and we’ve watched the economy and the financial markets evolve, and he has decided it was time to go with the aggressive option,” he told Politico.

Holtz-Eakin demurred when asked for more specificity about the exact timing of McCain’s decision, saying, “We don’t discuss the internal advising and decision making.”

The editorial board of the conservative National Review magazine on Thursday rapped McCain for not detailing the borrower criteria, expressing skepticism that he could help “millions” without lowering standards to reckless levels.

An earlier proposal championed by Rep. Barney Frank (D-Mass.) to stem foreclosures — a plan the magazine opposed — “looks downright prudent compared to what McCain has proposed,” the editors wrote. The Obama campaign gleefully e-mailed the editorial to reporters.

“Without specifics as to what they plan on doing and how they plan on acquiring [the mortgages], it’s hard to mesh the various numbers that are being pushed around,” said Andrew Jakabovics, a housing expert at the Democratic-oriented Center for American Progress.

In March — the start-date of his evolution on the subject — McCain gave a major speech on the housing crisis, the first comprehensive articulation of his views. While several Democratic primary contenders had offered proposals to aid struggling homeowners, McCain counseled against strong government intervention and offered a harsh assessment of the role of borrowers in creating the mess, as well as lenders.

“[I]t is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers. Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy,” he said.

Less than a month later, McCain outlined his HOME plan, which would help certain subprime borrowers refinance into affordable fixed-rate loans, though he continued to insist that no taxpayer money should go to help speculators or market participants who failed to perform their “due diligence.”

The HOME proposal looked very similar to one being hammered out at the time by congressional Democrats, led by Frank. The congressional version, which allowed the FHA to refinance up to $300 billion worth of mortgages, became law in late July.

McCain did not offer his "Resurgence" plan or any new proposals during negotiations on the $700 billion bailout.

McCain now believes the crisis is such that the government needs to reach more homeowners than the congressional program, said Holtz-Eakin. Experts expect that plan to only help about 400,000 homeowners.

“We just think that as conditions have evolved, we’ve got to have a more effective program,” he said.

Having the government buy original loans and refinance them directly “will be a much quicker process” than the congressional program, he said. “It will also be broader in scale because it won’t require the voluntary participation [of lenders], and it will be more effective in stabilizing financial markes.”

The McCain plan also relies on existing powers — including the $300 billion refinancing authority granted in the congressional bill — and therefore wouldn't require new legislation.

In contrast with McCain’s plan, however, that congressional program requires lenders and mortgage investors to reduce the mortgage principal to about 90 percent of the home’s current value, thereby taking a pretty significant loss on the loan.

Lawmakers contended that the arrangement protects taxpayers and reduces so-called “moral hazard” — the risk that government intervention would lead lenders to believe they would always be rescued from their bad business decisions. To make sure homeowners weren’t let off the hook, the law required them to share any future profits from the resale of their homes with the government.

“Clearly we face the tradeoff that we would in fact be taking the negative equity position and putting it on the taxpayers’ books instead of putting it on the private lenders’ books or the homeowners’ books,” Holtz-Eakin said. “We think the balance of risk has shifted to the point where this is the way to go.”

Sabato said McCain’s housing surprise fits within a larger pattern of trying to gain traction as the market woes dominate the campaign.

“They’re lurching from one subject to another hoping to change the subject from the economy, or from the Democratic aspects of the economic crisis. That’s all,” he said

Some observers, however, see real merit in the proposal even if they weren’t the loudest voices Wednesday.

Conservative financial scholar Alex J. Pollock of the American Enterprise Institute said he was not bothered by the lack of specifics at this stage.

"Ideas go from the general to the specific, not the other way around,” he said.

And while he isn’t ready to judge the merit of McCain’s proposal, he is one conservative who supports the general proposition that lenders and borrowers need a bailout.

“When you get into the bust and the panic, you have to do things that you’d rather not do, and that’s where we are. And I think that’s what Sen. McCain has understood with this proposal.”

Lisa Lerer contributed to this report.
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