Lots to mull over in Tuesday night’s debate devoted largely to the economy. Both seemed relatively at ease in the town hall format, and neither said anything that looks likely to change the race fundamentally. Which is another way of saying neither committed a big gaffe, and John McCain didn’t appear to do enough to shift the momentum race back his way. According to recent polls, he now trails Obama by around 8 or 9 points, largely because of the economy’s woes. As the financial and economic crisis has grown, voters have increasingly decided they trust Democrats more to deal with the problems, and Obama has benefitted hugely from that shift.
But one thing does stand out: Having heard both these two candidates speak many times, there was only one new idea that was proposed in the entire debate, and it came in answer to the first question. Asked how they would deal with the housing and economic crisis America is facing, McCain said he would order the Secretary of the Treasury to “buy up the bad home loan mortgages in America and renegotiate at the new value of those homes, at the diminished value of those homes.”
The notion of havign the government buy up mortgages directly has been discussed since the early days of the crisis and has generally been backed by Democrats; Senator Obama proposed a similar, though more limited, idea in recent weeks. But for McCain, the idea is new -- and it's a big shift. He clearly meant to use it to position himself as different from both George Bush and Barack Obama on dealing with the average American's woes. (Dare I say Joe Six-Pack's woes??) It's also a huge ideological shift for a man who is running as a fiscal conservative, and who was far slower than his Democratic rival earlier in the year to argue that the Federal government should step up to aid troubled homeowners facing foreclosure.
Given the way the sentence was phrased, it wasn't immediately clear exactly what McCain meant -- or the financial implications of what he is suggesting. Was he suggesting that the government buy up every bad mortgage at its original value and then refinance the homeowner into a lower-priced, affordable mortgage? Or did McCain mean that the Treasury should negotiate first with the lenders or investors holding the mortgages to reduce the values of the original mortgages to realistic current values before buying them out and refinancing the loans?
The first option would mean that the government would take the hit on the difference between the original loan values and current, much lower values, while the second would mean that the banks and investors currently holding the loans or the mortgage-backed securities they've been packaged into would have to agree to take that immediate loss in hopes of avoiding the greater loss that could come from foreclosure. That's the idea behind legislation that was passed this summer that went into effect on Oct. 1st. (That bill is known as the "Frank-Dodd" measure, after its sponsors in each house, Rep. Barney Frank (D-Mass) and Sen. Chris Dodd (D-Conn). It is aimed at helping reduce foreclosures among homeowners whose homes are no longer worth the value of the mortgage -- a condition known as being "underwater".)
Under the Frank-Dodd legislation, lenders or loan servicers must decide voluntarily whether or not to participate in the program, since the government obviously cannot order them to take a haircut on their loan values. Indeed, their hesitancy to do so voluntarily, for fear of lawsuits from holders of some tranches of the mortgage-backed securities pools, is a big reason foreclosures continue to mount.
In a conference call this morning with reporters, and a follow call with BusinessWeek, McCain's top economic advisor, Douglas Holtz-Eakin, made clear that the Arizona Senator is proposing the first option: under his plan, the government would by the mortgages from banks and investors at the original value of the loan, no matter how overinflated that now appears to be. "We’re (proposing) buying back the original mortgage at the original value and then giving (the homowner) the new mortgages" at current values and more affordable interest rates, Holtz-Eakin told BusinessWeek. "Obviously the taxpayer is on the hook for the difference."
That could be a huge sum: enormous numbers of homes are now underwater and are no longer worth anywhere near the value of their current mortgages. Indeed, the Wall Street Journal reported today that 1 in 6 homes is now underwater. Moreover, buying out mortgages at their current values would essentially mean bailing out the lenders who made those loans, or the investors who now hold them, at what have proven to be highly inflated values. (Values which were often inflated with the complicity of the lenders and appraisers who made the loans.) They would essentially be made whole on those loans.
Holtz-Eakin says that an earlier proposal by McCain would have required lenders and investors to take a loss by selling the mortgages for more reasonable current prices, much like the Frank-Dodd bill calls for. But given the severity of the problem--and the limited response that's likely to get from mortgage holders, he says the government must step up and take the hit in order to put an end to the foreclosure crisis. "Our original proposal had that feature in it – it required the voluntary participation" on the part of the lender, he says. "But that gets you smaller scale of activity, it slows everything down and ...I think the balance has shifted (to the need) for a broader more aggressive approach."
A statement that's up on the McCain-Palin Web site fills in some more of the details. It says the plan would cost $300 billion. It would buy mortgages directly from homeowners and mortgage servicers and replace them with "manageable, fixed-rate mortgages." That help would be available to mortgage holders who live in the home as a primary residence, who can prove they didn't fake their qualifications for the loan, and who provided a down payment. The statement also indicates McCain believes the purchases can be made quickly as a result of the authority given the Treasury Secretary in various pieces of legislation.
Clearly, addressing the underlying foreclosure crisis will be critical to resolving the broader financial crisis in the coming months, and simply buying bad mortgage-backed securities and loans from the banks and others who hold them won't be enough if average Joes keep losing their homes. But if the one fresh idea to come out of this debate was meant as a serious proposal as opposed to simply fodder for the debate, more explanation will still be needed. As Alex Castellanos, a Republican strategist, put it on CNN after the debate ended, the notion of buying up houses is a "really interesting idea," but it wasn't well explained.
A focus group of undecided voters in Las Vegas, Nevada held by pollster Stanley Greenberg of Greenberg Quinlan Rosner seemed to confirm that sense. Greenberg, a longtime Democratic pollster (he helped elect Bill Clinton and is partners with uber-Democratic strategist James Carville) is hardly an objective source, but the immediate reading he got from the undecided voters he tracked during the debate seems to confirm the sense that the idea may not have made a big dent in public opinion.
While McCain's housing proposal got a brief positive response from the assembled group, Greenberg says it was relatively small. The proposal came amidst a lot of other discussion, "without a lot of context," says Greenberg. "It was a one time thing he threw out; he didn't come back to it." If he had, Greenberg adds, it might have made more of an impression on the surveyed voters. "It was not dramatic, though he got a little rise out of it. But he moved on."