John McCain announced a radical idea relating to mortgages in the presidential debate last night. Earlier today his camp provided more details. Here is a useful summary from an article over at US News and World Report:
Here’s how it works:
Step One: Struggling homeowner contacts mortgage broker
To initiate the process, struggling borrowers tell their mortgage broker that they would like to refinance their loan through this initiative. The program would be open to a wide swath of distressed borrowers: You do not have to be in foreclosure or even underwater on your mortgage to participate. Participation is limited to primary residences and homeowners who can prove that they were creditworthy borrowers when they got their original loan.Step Two: Government buys the distressed mortgage
If the troubled borrower qualifies, the government will buy the mortgage.Step Three: Government provides a new, federally guaranteed mortgage
After acquiring the distressed mortgage, the government will swap it for a more-affordable, fixed-rate home loan backed by the FHA. Holtz-Eakin said the rates for the new mortgages would be “in the low fives at this point.” That’s significantly less than current 30-year fixed rates. Funding would come from existing initiatives such as the recently enacted $700 billion bailout. By stabilizing the housing market, Holtz-Eakin said, the plan might be able to ease the stress in the credit markets enough to reduce the final tab of the $700 billion bailout.How many people will it help?
Holtz-Eakin said McCain’s plan “could help literally millions of people.”Will it work?
Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School, says that while the plan could certainly help struggling borrowers, it may end up costing more than estimated. “Three hundred billion does not sound like it’s nearly enough,” she says. That’s partly because there are so few limitations on who can participate in the program. “The way it reads here, tomorrow we should all be lining up [to participate],” Wachter adds.Meanwhile, Christopher Thornberg of Beacon Economics doesn’t think the plan will be able to halt the painful decline in home prices. “The problem is not people losing those homes; the problem is people trying to buy those homes can’t afford them,” he says. Despite precipitous declines already, home prices have to fall further before they become affordable to most Americans, Thornberg says. McCain’s plan is predicated on the notion that “if we could just stop home prices from falling, everything will be fine,” Thornberg says. “And my comment to that would be: ‘Yes, and if we could just stop gravity, we could all fly.’ “