By DemocracyRules
I've blogged about this before.
I've left out certain details here to simplify things.
The basic idea is if a bank holds a low-interest mortgage on a depreciated house, that mortgage isn't worth much. This is especially true if the homeowner isn't making all the payments.
If the bank wants to sell this mortgage to clear this "bad loan" off their books, then they have to sell it for less than it's "face value". Right now these "bad" mortgages are selling for about 30 cents on the dollar. That's what the feds are doing with the $700 billion, buying up these "bad" loans at deep discounts.
Even at these prices, it helps the banks to get these mortgages off their books, so they won't go bankrupt, and suck the rest of us down with them.
The feds could then sell these mortgages at maybe 50 cents on the dollar to other investors who don't mind the risk. Banks are forbidden from making such risky investments, but other investors can. The re-sale would make a good profit for taxpayers.
But McCain and others have a better idea. The feds could go to the homeowner and offer to discharge their current mortgage completely, clear it off. The homeowner could then get a new mortgage with a higher interest rate, but a smaller principal. The idea is to make the monthly payments more affordable to the homeowner. The feds can actually give homeowners a pretty good deal, because they bought the mortgage at a deep discount.
The new mortgage will cost the homeowner less per month, and it will be fully secured by the house. The homeowner will be able to make the payments, and they will want to stay in the house because the can't get cheaper housing elsewhere.
Now the feds own a fully performing mortgage that they can sell to any investor, because it's a fully-secured, well-performing mortgage. They could get 80 to 100 cents on the a dollar for that mortgage! Everyone wins.
Critics of this plan say it'll be hard to implement if house prices keep sliding. But the re-mortgaging idea would probably help slow or stop the decline in house prices. With new and sensible financing available for cheap homes, potential homeowners would be attracted back into the market.
The details are linked below. The main idea is to ensure the taxpayer makes money.
Quotes about the plan from McCain in the Oct 8 debate
"The home mortgage buy-up has already been approved"
McCain's policy chief discussed the plan today. In this scenario, some fed money would get spent to re-mortgage the houses. However, this re-mortgage plan will also relieve banks of a lot of bad debt. That means less than $700 B would be needed to rescue the banks. This frees up enough $$$ for the re-mortgage plan.
"On a conference call with reporters, McCain policy chief Douglas Holtz-Eakin spelled out how McCain would pay for his plan for the government to buy troubled mortgages and replace when with more favorable fixed-rate mortgages at minimal direct cost to the homeowners. The government could use some of the $700 billion authorized for the bailout and tap other accounts, although the campaign estimates that, owing to negative equity - the government can't magically turn bad mortgages into good ones without taking a hit - would be $300 billion. The McCain team hopes that by buying mortgages directly, the government wouldn't have to buy as many distressed assets from big banks, thus reducing the net cost. McCain claims this idea as his own. The bailout/rescue bill already gives the government the authority to deal directly with homeowners."
Pro Patria
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