Thursday, October 09, 2008

Not Everyone Under Water is Drowning - Why John McCain's Erratic Homeowner Bailout is Unnecessary

McCain's debate performance was stylistically stronger than I anticipated, but it was more troubling than I ever dreamed. One of the things that scares people about McCain is his tendency toward erratic behavior (erraticism?). At the debate, during a time of international financial turmoil and domestic near-panic, McCain announced a crazed new plan to throw money at people who have demonstrated their lack of financial acumen - he wants to buy the mortgages of houses that are "under water". If you have a mortgage with a value higher than the market price of your home today, John McCain wants to buy your mortgage from your bank and give you a new one with a reduced value.

It's this sort of erratic over-reaction that concerns me about John McCain. That's not maverick, that's manic.

For those of us who view houses as homes, and not commodities, the relative value of our mortgage to our home's market price is not a burning issue. If you're not selling and you're not buying, it doesn't matter if you're underwater. If you're not in the market, the short-term market price isn't really all that big a deal.

I don't really know what the market value of my house is today. I don't have a precise number for how much we owe on it, either. Why should I care? The real number I focus on is how much I need to pay every month for my mortgage - and that does not fluctuate according to the market place. Even if I had an adjustable rate mortgage (which I don't, because I realized what the A in ARM stands for), I wouldn't be focused on the value of my house, I would be focused on the cost of my mortgage. If I have enough current income to service my mortgage, I don't need to focus on my long-term capital value.

Those of us who own one home, and live in that home, can swim underwater quite happily for a long time - at least until we need to sell. I don't need lifeguard John McCain to bail me out with your tax dollars.

For most of us, our home is our most significant capital investment. As with any capital investment, we hope it appreciates, but cyclical changes in value are only unrealized gains and losses, unless we choose to sell.

While there may be some economic rationality in walking away from a mortgage that is going toward the purchase of a home with a mortgage value greater than its market value, the truth of the matter is that most of us are not going to do that if we still have current income to service our mortgage. That's just not how real families work.

For real families, a house is not an investment to walk away from while you have enough income to pay the mortgage. Our children sleep in the bedrooms. We cook in the kitchens, and relax in the living rooms. The sense of "home" and stability is more important than what an appraiser says my building is worth. Even if it weren't, the hassle of moving and potential destruction of my credit rating would keep me from walking out.

But John McCain wants to use tax dollars to bail me out, even if I don't realize that my market value may be less than my mortgage value.

Like so many issues in America, this is a hidden class battle. John McCain owns multiple houses, so he doesn't share the same concept of "home" that the rest of us do. He has a portfolio of houses - somewhere between 8 and 13 diversified units that he holds largely as tax-favored investments. For him, it does not make even a tiny bit of sense to pay a million dollar note on a house that is worth $990,000. To him, that's the same as paying yesterday's value on a stock that has dropped one percent - it is an economical irrationality, and a crisis that must be solved with taxpayer money.

For most normal Americans, the housing crisis will not be a crisis unless we start losing our jobs. John McCain's proposal to inject massive amounts of tax dollars into the mortgage industry is not designed to save jobs - it's designed to save capital. Real estate does not employ people.

The average American family does not even have an accurate, up-to-date valuation of its home. The crisis does not exist in the possible gap between mortgage value and market value - the gap that John McCain wants to spend hundreds of billions of dollars to address. The crisis exists only in the possible gap between mortgage cost and current income. John McCain's plan ignores that gap.

That's the gap keeping America awake at night worrying, John McCain. "That one."

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17 Comments:

Anonymous Nathan said...

I'm not a big fan of this plan either, but you have some of your facts wrong. McCain's plan calls for buying the mortgages of homeowners who are already delinquent in their payments or likely to be so in the near future. THESE are the people whose home's market value vs. their mortgage balance is an issue. Part of the reason we're in this mess now is that when people fall behind on their payments and realize that they owe more than their house is worth they are inclined to just give up and allow the house to be foreclosed upon. I'm not sure how you determine who is likely to be delinquent in the near future, there are at least some restrictions on who will benefit from this plan.

10/09/2008 8:21 AM  
Anonymous travel said...

Here I agree with you and Obama. Not only is the principle wrong, McCain almost made me throw my shoe through the television during the debate. I heard that Romney was asked about the plan right after the debate and he had never heard of it. Just exactly who is advising McCain anyhow and if it isn't Mitt, why not?

Let me, however, give you a real world example of who this would help, my own sister. She is an educated person with a Masters Degree in Education whose mortgage is currently in foreclosure. How did they get there? Bought a house for about $150K - a new house and a nice one too in a small town in Wisc. where home values are significantly less than they are here. Anyhow, first mistake they made was get an adjustable rate mortgage. Then, they lived above their lifestyle in other ways and got into trouble and needed to refinance. They didn't have good credit so hooked up with a predatory lender who had their house reappraised above $200K which was way too high and not in keeping with the area and once again they did it with another adjustable rate mortgage. Well, the chickens finally came home to roost and now they are losing the house. I would expect their story is far from unique.

Now, I love my sister but I don't believe the government should buy her house under McCain's plan. Her whole family has given them small loans over the years because of one crisis after another and we've never been paid back. They are terrible money managers and even if their house was refinanced by the government, I don't believe they'd change a thing about their out of control spending habits and probably default on the new mortgage same as the old. They need to learn a few lessons and bailing them out isn't the way to do it.

10/09/2008 8:25 AM  
Anonymous Anonymous said...

Nathan - I think Dan's right. Nothing in McCain's description at the debate was so limited, and even his website is vague this morning. You MIGHT be right, but given McCain's erratic behavior lately, it's awfully hard to tell.

And anybody underwater could be viewed as likely to default.

10/09/2008 8:33 AM  
Anonymous The Truth said...

In Debate, McCain Touted Mortgage Plan Already Proposed By Obama

Looks like the Obama camp is claiming this to be Barry's idea before it was McCain's idea.

Further, Dan said; "John McCain owns multiple houses, so he doesn't share the same concept of "home" that the rest of us do. He has a portfolio of houses - somewhere between 8 and 13 diversified units that he holds largely as tax-favored investments. For him, it does not make even a tiny bit of sense to pay a million dollar note on a house that is worth $990,000. To him, that's the same as paying yesterday's value on a stock that has dropped one percent - it is an economical irrationality, and a crisis that must be solved with taxpayer money."

Well folks, you can just make this stuff up. -and Dan just did! If Dan didn't just make it up, I'm sure he can provide us with a supportive link.

Dan's apparent motto: Fabricate anything you want. Some people will believe you.

The same "make it up and hope someone will believe you" has been used by Dan to support "The Funk". I think we've all grown tired of that rhetoric.

10/09/2008 8:49 AM  
Anonymous Anonymous said...

The Untruth -

Actually, it's true. McCain owns at least 8 houses, and maybe more. http://www.swamppolitics.com/news/politics/blog/2008/08/john_mccains_home_count_up_eig.html (Sorry, I don't know how to embed a link.)

By the way, if it really were the same thing as Obama's plan, then wasn't McCain lying when he said "it's my proposal, not Senator Obama's proposal or President Bush's proposal." Was McCain lying?

Also, you're only the latest of many to falsely accuse my buddy Dan of lying. Care to provide an example?

10/09/2008 8:58 AM  
Blogger les said...

Dan's right on another front--McCain made this plan up without reference to his advisors. It's hardly a repub notion--effectively transferring tax dollars directly to individuals, although there are benies for the mortgage holder if the gov pays face value for the debt. One of many problems with the notion ties back to the reason this bubble burst so spectacularly--millions of home loans have been bundled, sliced, securitized, sold and resold; while every loan has a servicer taking payments, it is far from clear who actually owns any particular note and has the right to sell it or renegotiate it. An off the elderly cuff notion, fraught (geeze I love that word) with complexity and bad economic ideas.

10/09/2008 9:28 AM  
Anonymous the Truth said...

OK; I'll call Dan out.

Dan said (about McCain); "For him, it does not make even a tiny bit of sense to pay a million dollar note on a house that is worth $990,000."

Is something fabricated by Dan a lie? -I think so. Unfortunately, since such a statement lives as reality in Dan's mind, Dan will not consider it to be a lie.

"The truth is not for all men, but only for those who seek it." -Ayn Rand

""it's my proposal, not Senator Obama's proposal or President Bush's proposal." Was McCain lying?"

Quite possibly -YES. If the proposal was originally made by Obama, then McCain would be lying. However, you don't get to have it both ways. Was it McCain that came up with the "crazed new plan", or was it Obama?

10/09/2008 9:29 AM  
Blogger sophia said...

Heh. Nice use of "that one." My analysis of McCain's mortgage proposal was shorter than yours: what the hell did that man just say?

10/09/2008 9:34 AM  
Anonymous John Galt said...

Wow - an Ayn Rand quote!! Love it! Nothing says "half wit with delusions of adequacy" quite like quoting Ayn Rand!!

But, on to the substance - Dan's right - that is the reasonable conclusion to draw from McCain's focusing on people being "underwater" rather than on people servicing their mortgage. It gets to the difference between net worth and income. John McCain is worried about people paying more on their mortgage than the asset is worth (which, by the way, we all do, if you stop to consider interest), while real Americans are only concerned about having enough income to stay in their houses.

10/09/2008 9:43 AM  
Blogger les said...

More details and an interesting discussion; "half baked" would be a generous description.

http://delong.typepad.com/sdj/2008/10/john-mccains-ne.html

10/09/2008 9:59 AM  
Anonymous the Truth said...

Looks like having the government by delinquent mortgages was an idea proposed by Senate Banking Committee Chairman Christopher Dodd on May 7th.

House Democrats eye government mortgage buyouts

10/09/2008 10:00 AM  
Anonymous John Galt said...

So, then, Dan told the truth and McCain lied? Thanks for confirming that, Truth.

10/09/2008 10:03 AM  
Anonymous The Truth said...

Yes John Galt

McCain lied, and the Democrats came up with the "crazed new plan".

I almost can't believe it. John McCain was willing to take the sole responsibility for coming up with the "crazed new plan", but the Democrats now want the credit.

Where was Dan's article about this "crazed new plan" back in March when Dodd introduced it? (Yes, I transposed the date incorrectly in my last post)

10/09/2008 10:14 AM  
Anonymous Anonymous said...

This is the best post you have ever written. Seriously.

10/09/2008 11:50 AM  
Blogger les said...

Dear Truth: from the National Review Online (a dependably conservative source):

McCain’s plan would also be a gift to lenders who abandoned any sense of prudence during the boom years. Under the Frank-Dodd bill, lenders must agree to “take a haircut” — slang for writing down the value of a mortgage — in order to qualify for federal insurance on a distressed mortgage. The lender bears an initial loss but is protected if the borrower eventually defaults. McCain would transfer that initial loss to the taxpayers.

Those nasty facts and their liberal bias.

10/09/2008 2:27 PM  
Anonymous travel said...

This is all craziness. We shouldn't be buying up anybody's home loan. We're going to have to let people and companies fail. Enough !!!

10/09/2008 3:37 PM  
Anonymous The Truth said...

Les

You are correct. I agree. However, Dan's post had nothing to do with the intricacies of McCain's plan.
Dan found it to be a “crazed new plan to throw money at people who have demonstrated their lack of financial acumen”.

"If you have a mortgage with a value higher than the market price of your home today, John McCain wants to buy your mortgage from your bank and give you a new one with a reduced value."

McCain's announcement was clearly pandering to the liberal side of the Independents.

I don't agree with any buyout plan. The greedy and, the ignorant alike, should both suffer.

10/09/2008 5:01 PM  

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