McCain Delivers In Housing Crisis Speech

(National Review Online)  This column was written by the editors of National Review Online

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Correctly defining a problem is always the first step toward solving it. All three presidential contenders delivered major economy-themed speeches this week, but John McCain demonstrated a better understanding of the housing crisis than either of his potential Democratic opponents. His speech was short on specific policy proposals, but he declared himself open to "any and all proposals, based on their cost and benefits."

Democrats criticized McCain's speech for lacking specifics, displaying their fondness for laundry lists of government "solutions" to complex problems. The Democrats' various proposals indicate that they have misdiagnosed the causes of the current crisis, attributing too much blame to "predatory lending" while absolving irresponsible borrowers who took out loans they could not afford. Conservatives needed to hear the Republican nominee present a broad and accurate overview of the crisis; the specifics can wait.

Rising home prices led lenders to lower their standards, McCain said. "Some Americans bought homes they couldn't afford," he added, "betting that rising prices would make it easier to refinance later at more affordable rates."

Wall Street helped inflate the housing bubble, McCain argued, by betting big on mortgage-backed securities. When housing prices started to decline and foreclosures started to rise, a widely dispersed network of investors found themselves owning a lot of questionable mortgage debt, which sent investors into a panic.

In McCain's formulation, irresponsible lending and borrowing created the problem, and uncertainty is at the root of its spread throughout the financial community. If accurate, this diagnosis demonstrates the folly of the Democrats' proposed cures, which would reward irresponsibility and increase uncertainty among investors.

The meat of Barack Obama's speech consisted of defending a plan he has co-sponsored with Senate Banking, Housing and Urban Affairs Committee chairman Christopher Dodd. Dodd and House counterpart Barney Frank have proposed allowing the Federal Housing Administration to pay lenders a cash fee in exchange for writing down troubled mortgages and refinancing them through FHA at lower interest rates. Obama insisted that the Frank-Dodd plan is not a bailout for lenders and borrowers who gambled on home prices. If putting taxpayers on the hook for billions of dollars' worth of the riskiest loans isn't a bailout, we're not sure what is.

The Frank-Dodd plan would also reduce the size of the down payment needed to qualify for future FHA loans. Statistically, borrowers with little to no equity in their homes walk away from their loans more often. Thus, the Frank-Dodd approach, which Hillary Clinton also supports, would provide a taxpayer-insured bailout now and increase the likelihood of future mortgage defaults.

In his speech, McCain said he opposes reducing the down-payment requirement for FHA mortgages. This is the right approach. As McCain noted, rising housing prices during the boom encouraged lenders to push interest-only mortgages on borrowers who could never afford to pay off the principal. For their part, many borrowers misrepresented their ability to pay off these risky loans. Forcing the taxpayer to pick up the bill rewards both groups, and makes fools out of those responsible homebuyers who borrowed more prudently.

Hillary Clinton proposed an even worse approach this week when she called for legal immunity for mortgage servicers who freeze the interest rates on adjustable-rate mortgages. Adjustable-rate mortgages, or ARMs, are home loans in which the borrower starts out paying a low "teaser" rate of interest that resets to a higher rate over the course of the loan. Last December, the Bush administration brokered a deal between lenders and investors to allow cash-strapped borrowers to keep paying the teaser rate on their ARMs a little longer.

Clinton wants to go further and freeze the rates on all ARMs for five years. Mortgage servicers would probably go along with this, because they get paid the same amount whether the interest rate on a loan is 1 percent or 5 percent. But the people who own the mortgages - in many cases investors in mortgage-backed securities - have threatened to sue to protect the value of their investments.

To prevent that, Clinton has proposed providing legal immunity for mortgage servicers who cooperate. Servicers enter into contracts with investors that specify the circumstances under which they can work out deals with borrowers. Clinton's plan would render these contracts null and void, contributing to the uncertainty that is paralyzing the financial markets. The reputation of American securities would be dealt a serious blow.

McCain's approach, on the other hand, is to avoid policies that reward irresponsible behavior; to increase transparency in the financial markets; and to allow the Federal Reserve to act only when a systemic crisis appears likely. The Democrats' knock on McCain is that he doesn't know the economy, but his speech offered a better understanding of how markets work than anything the Democratic candidates have offered so far.

By the editors of National Review Online
Reprinted with permission from National Review Online

[rational_1]

I''m a bit torn on this mortgage crisis. One the one hand I''m very sympathetic to someone who doesn''t have much money and managed to scrape together enough to buy a fairly basic house and the only way they could afford the monthly payments was to go the ARM route. That those people are now getting hosed by increasing rates is a shame.

On the other hand there are a lot of other people out there who over-extended themselves buying an extravagant house and the only way they could do it was with an ARM - I have no sympathy for them and don''t want my tax dollars used to bail them out. Is it fair that they saved hundreds per month on their ARM mortgages while I dutifully paid more on my 30 yr fixed mortgage when times were good? Now when my fixed mortgage looks good, they whine about their interest rates driving their house payments out of reach. Personal responsibility folks - if you''ve got a $350K house and a leased Beemer in your driveway but no money because your rates shot skyward, then you''re an irresponsible idiot who didn''t do his homework before buying and you don''t deserve my tax dollars.

So how do do Obama and Hillary plan on distinguishing among homeowners in those two groups?

[it_oldtimer]

McCain is obviously just as clueless about the economy as he is about Iraq.

He got into the Senate because people felt sorry for the poor old POW. He got this far in the Presidential race solely on his wifes money and ambition.

But the sad reality is that he''s very likely not even as bright as Bush is, and by now we all know just how smart Bush is, don''t we? If cluelessness were musical, Bush - and McCain - would both be big brass bands.

[ubrew12]

nonyabiz2 said: "Are you and I gonna subsidize these people and allow them to continue to benefit from their poor decisions? Should you and I be punished financially because somebody else was neglegent in their borrowing practices?"
Borrowers don''t decide to borrow all on their own. Lenders make that decision. By flooding the market with cheap loans (aka the Fed) and tax cuts (aka Bushs doubling of the national debt), EVERYONE was encouraged to borrow up to their necks with cheap loans. You mention ''teaser'' rates yourself, and irresponsible lenders. But, ultimately, it was Bush''s decision, and that of Bush''s Fed, to hook the country on cheap money that was actually being borrowed. I suppose ''at least'' it got Bush reelected (as it did Reagan before him).

So-called fiscal conservatives caused this. I think thats the bitter pill you are having trouble swallowing.

[irliberal]

Sung to the tune of Barbara Ann: "Bomb bomb bomb, bomb bomb Iran" -- Sung by John McCain during a press conference.

Nope, not a joke. It is true. Look it up for yourself on google or youtube.

I think that pretty much sums things up. If you want a war in Afghanistan, Iraq AND Iran (and who knows how many other countries) then, by all means, vote for McCain.

[samthetvcat]

OMG - Okay, Politico says McCain''s speech was crafted in part by former Sen. Phil Gramm who is the jerko who crafted all the legislation which deregulated the market and let to the whole mortgage debacle in the first place.

The regulatory framework that had been in place since the 1930''s was repealed by the Gramm-Leach-Bliley Act.

In 2005 while working as a lobbyist, Gramm received $750k for persuading Congress to roll back State oversight of predatory lending.

Now McCain''s using this greedy creep to formulate his mortgage meltdown policy of ''do-nothing'', and has even hinted that he might appoint Sen. Gramm his TREASURY SECRETARY if he becomes President.

ARE YOU KIDDING ME?????

Dems 08!

[samthetvcat]

--"I don''t always agree with Sam but today I do. 8-)"--
Posted by IRLiberal

Yay!!! :D

[irliberal]

Barack has solutions. Hillary has solutions. McCain and the NRO have nothing. And it shows.
Posted by SamTheTVCat

I don''t always agree with Sam but today I do. 8-)

[it_oldtimer]

Nobody seems inclined to ask the obvious question: "where did the banks get all that easy-money to loan to all these subprime borrowers?"

The answer is: they got it from the Federal Reserve, just as they''re getting hundreds of billions more right now.

After the dot.com bust in the 90''s the Fed flooded the economy with freshly printed money to keep the economy afloat through that collapse. Alan Greenspan thought that was okay to do that because American productivity SEEMED high (because inflation was not rising). As it turns out, US productivity was, at best, mediocre -- it was CHINESE productivity that was booming, providing us with ultra-cheap goods that masked our own hidden inflation threat.

Now Bernanke is making the very same mistake - he''s flooding the banking system (including Investment Banks this time, too) with dirt-cheap Federal loans and credit lines. The problem with that is that those that took that easy bailout money from the Fed in the 90''s didn''t have a clue how to wisely spend it all - so they just used it to make marginal loans to anybody and everybody. They still don''t have a clue what to do with this new influx of cheap Federal loans - so we can expect yet another financial catasptrophe in a few years as a result of THIS misguided bailout.

[it_oldtimer]

McCain really didn''t have anything to say about what he would do, he just read a laundry list of things he would not do.

In the end it all boiled down to an admission that if he''s elected he''ll continue to do exactly what Bush has done - bail out the wealthy speculators and the bankers with taxpayer funds, and hang the little mortgage holders out to dry.

He''s all for corporate deregulation - even though it''s that very lack of adequate government regulation and oversight that allowed this situation to get as bad as it has.

With McCain in charge I''m sure we would see a LOT more of these rich-man''s con games in the future.

You simply CANNOT trust corporations to regulate themselves - that''s been proven time and time again. Given enough rope they will always run amok because of their own unbridled greed.

[samthetvcat]

nonyabiz2 - wow, did I ever strike a nerve . . . I''m sorry if you find it embarrassing that neither you, nor the NRO, nor McCain has any solutions on how to prevent overleveraging from occurring in the future.

It kind of makes a mockery of your claims that you stand for personal responsibility when you won''t own up to the choices you''ve made and the consequences that have resulted . . . who exactly is it that is supposedly going to be giving McCain his ''ideas''? Where are they then and if that other person is going to be supplying the ideas then why the heck didn''t you vote for that person rather than McCain? You all could have nominated Romney but didn''t because he was too ''slick'' or something like that. Well then you''ve reaped what you sowed, and that''s getting called to the mat for not having any solutions.

So now nonyabiz2 has not only shown himself to be ignorant and lacking in ideas, but also lacking personal responsibility and hypocritical . . .

My guess is that if you respond, it STILL won''t be with solutions - just more typical GOP whining like a high school girl . . .