Does John McCain recommend a spending freeze to help stabilize the economy, or want the government to purchase bad mortgages from struggling homeowners? Well, according to his answers during Tuesday night’s debate, both. Early in the debate, McCain recommended that the federal government buy up bad mortgages from landowners and replace them with lower cost, fixed-rate mortgages, which he said would help keep Americans in their homes.
How expensive will this be? CalculatedRisk notes his own and the WSJ’s estimates of how many households have negative housing equity – something close to 12 million. He also notes what he calls a bad policy proposal from Glenn Hubbard and Chris Mayer. Whether or not the following proposal is a good idea or a bad one – it’s going to add to the Federal debt:
Housing starts are at their lowest level since the early 1980s, while there are more vacant houses than at any time since the Census Bureau started keeping such data in 1960. Millions of homeowners owe more on their mortgage than their house is worth. Foreclosures are accelerating. House prices continue to fall, weakening household balance sheets and the balance sheets of financial institutions. But this can stop. The price of a home is partially dependent on the mortgage rate -- a lower mortgage rate raises house prices. We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years), and place those mortgages with Fannie Mae and Freddie Mac.
Details of McCain's proposal can be found here:
The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner. The direct cost of this plan would be roughly $300 billion, because the purchase of mortgages would relieve homeowners of “negative equity” in some homes.
Something tells me that this proposal would cost a LOT more than $300 billion. If anyone has a credible analysis of what this proposal would likely cost – that would be most appreciated.
Update: Brad DeLong places his estimate at only $100 billion but that’s because he views the McCain plan as not buying that many bad mortgages:
Democrats want to prevent depression and support the financial markets by investing taxpayer money in banks with troubled assets. Republicans want to give taxpayers money away to the shareholders and managers of banks with troubled assets.