McCain plan would buy bad mortgages

Would use $300b of bailout package

WASHINGTON - John McCain's proposal to buy up bad home mortgages would use nearly half the $700 billion from the Wall Street bailout package to assist Americans directly, instead of indirectly by rescuing the nation's financial markets.

The Republican presidential candidate announced during Tuesday night's debate that he would order the federal government to spend $300 billion in federal funds to buy the mortgages and allow financially troubled homeowners to keep their houses.

Democratic nominee Barack Obama last month proposed that the government consider taking such a step, and his campaign initially said McCain's plan wasn't new. But yesterday it criticized the idea, calling it "erratic policy-making at its worst."

McCain's proposal, which he called the American Homeownership Resurgence Plan, was far more categorical than Obama's.

"I would order the secretary of the Treasury to immediately buy up the bad home-loan mortgages in America and renegotiate at the new value of those homes - at the diminished values of those homes - and let people be able to make those payments and stay in their homes," he said.

Many Republicans voted against the rescue package, objecting to its size and to government intervention in the free market economy. McCain's step would represent an even greater role for government and potentially a greater financial loss.

Under the plan, the government would buy failing mortgages from homeowners and provide new fixed-rate mortgages. As a policy matter, the plan would probably have greater support among Democrats than Republicans. Economists with the liberal Center for American Progress have been pushing a similar idea for some time.

As conceived by Treasury Secretary Henry Paulson and as passed by Congress last week, the rescue package would be used primarily to purchase mortgage-backed securities. It would allow, but not require, direct purchase of mortgages. Under McCain's plan, the Treasury would be required to rework mortgages directly with homeowners whose houses were losing value.

McCain economic adviser Douglas Holtz-Eakin told reporters yesterday that the plan envisions mortgages in "the low 5 percent" that would help halt the plunge in housing values. Thirty-year mortgage rates are now hovering between 5.8 and 6 percent.

Holtz-Eakin said the plan would help stabilize the plunging values of mortgage-backed securities that have been at the heart of the crisis in the financial markets. "Senator McCain believes this is exactly the right kind of policy." Holtz-Eakin said. "Provide direct help to homeowners; at the same time, support the financial markets, and keep them from further damaging the availability of credit to Main Street."

Obama's economic policy director Jason Furman said in a statement that McCain's plan would be "even more costly and out-of-touch than we ever imagined. John McCain wants the government to massively overpay for mortgages in a plan that would guarantee taxpayers lose money, and put them at risk of losing even more if home values don't recover."