This article first appeared in the St. Louis Beacon: October 8, 2008 - A $300 billion homeowner rescue plan proposed by Sen. John McCain during Tuesday's presidential debate could be a "nonstarter'' because of the complexity of pooled mortgages, says Chris Krehmeyer, executive director of Beyond Housing, one of five nonprofit agencies that make up the St. Louis Alliance for Homeownership Preservation.
Details of McCain's "Homeownership Resurgence Plan" are outlined on the Republican presidential nominee's campaign website, at www.johnmccain.com.
McCain's plan calls for authorizing the U.S. treasury secretary to purchase mortgages directly from homeowners in financial trouble and mortgage servicers. (To read a brief description from Politico, click here, and for a description of changes McCain made to the plan Wednesday, click here. )
"The existing debts are too large compared to the value of housing. For those that cannot make payments, mortgages must be re-structured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they've already suffered,'' according to the McCain statement. The new mortgage would be an "FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner.''
Krehmeyer said the plan is a fine notion, but he fears it may not be doable because of the tangled complexity of loan pools, which makes it almost impossible to buy individual loans.
"I don't know how you unbundle that," Krehmeyer said. "It's not as though we can go to the corner bank and say, 'I'm going to buy up your bad loans.' The corner bank doesn't have the loans any more. They've sold them and reinsured them and leveraged them."
The nonprofit agencies that comprise the St. Louis Alliance for Homeownership Preservation provide free housing counseling for homeowners facing foreclosure.
McCain's statement says the plan could be implemented quickly because of the $700 billion stabilization plan passed by Congress last week, in addition to the housing bill passed last summer and the government's conservatorship of Fannie Mae and Freddie Mac, but that it might be necessary for Congress to raise the overall borrowing limit.
But Krehmeyer said the financial rescue plan ultimately has to address the fact that loan pooling makes it nearly impossible to force servicers to make loan modifications on individual loans.
"Unless the government buys 100 percent of each individual pool, they cannot force modifications and the right-sizing of the loans as McCain talked about,'' Krehmeyer said. "If the government buys 20 percent of a pool, it can't mandate that loan modifications have to occur in a certain manner, under certain conditions, because they have the other 80 percent of investors who own parts of that security instrument who would have to agree to that.''
Krehmeyer said that the government has implicitly said that the idea was to "buy the worst of the worst. If you're buying the worst of the worst, you're certainly not going to be able to do any significant modifications because you're only buying a portion of the loans.''
During the debate, Democratic nominee Sen. Barack Obama said the bailout legislation already contained provisions for allowing the treasury secretary to buy bad loans. The Obama campaign also said that he had suggested a similar step nearly two weeks ago.