Video: Choosing a financial leader

updated 10/8/2008 12:19:45 PM ET 2008-10-08T16:19:45

John McCain's proposal to buy up bad home mortgages would use nearly half the $700 billion from the recent Wall Street bailout package to assist Americans directly, instead of indirectly by rescuing the nation's financial markets.

The Republican presidential candidate announced during Tuesday's debate that he would order the federal government to spend $300 billion in federal funds to buy the mortgages and allow financially troubled homeowners to keep their houses.


But McCain's approach was far more categorical.

"I would order the secretary of the Treasury to immediately buy up the bad home-loan mortgages in America and renegotiate at the new value of those homes — at the diminished values of those homes — and let people be able to make those payments and stay in their homes," he said.

The proposal, which he called the American Homeownership Resurgence Plan, is as much a policy plan for the future as it is a political tactic for the present.

The economy has been a key factor in helping Obama pull ahead of McCain nationally and in key battleground states. What's more, Americans reacted with helpless outrage at the need for a $700 billion rescue for the country's financial institutions.

Many Republicans voted against the package, objecting to its size and to government intervention in the free market economy. McCain's step would represent an even greater role for government and potentially an even greater financial loss.

McCain made clear he would use the plan to distinguish himself not only from his rival but also from President Bush, an increasingly unpopular figure as the economy sinks.

"It's my proposal," McCain said. "It's not Sen. Obama's proposal. It's not President Bush's proposal."

Video: The bailout and the average American As conceived by Treasury Secretary Henry Paulson and as passed by Congress, the rescue package would be used primarily to purchase mortgage-backed securities. It would allow, but not require direct purchase of mortgages. Under McCain's plan, the Treasury would be required to rework mortgages directly with homeowners whose houses were losing value.

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McCain economic adviser Douglas Holtz-Eakin said the plan envisions mortgages in "the low 5 percent" that would help halt the plunge in housing values. Thirty-year mortgage rates are now hovering between 5.8 and 6 percent.

It was unclear — either from McCain's remarks or from the backup materials provided by the campaign — how such a massive plan would be administered. Though McCain, a budget hawk and critic of rising federal spending, did concede one point. "Is it expensive? Yes," he said.

Under the plan, the government would buy failing mortgages from homeowners and provide new fixed-rate mortgages. As a policy matter, the plan would likely have greater support among Democrats than Republicans. Economists with the liberal Center for American Progress have been pushing a similar idea for some time.

Holtz-Eakin said the plan would help stabilize the plunging values of mortgage-backed securities that have been at the heart of the crisis in the financial markets.

"Sen. McCain believes this is exactly the right kind of policy," Holtz-Eakin said. "Provide direct help to homeowners; at the same time, support the financial markets and keep them from further damaging the availability of credit to Main Street America, one of the — the real threats to the economy at this point in time.

The Treasury's current plans for the money, however, could be well under way by the time a new administration is sworn in next year, leaving fewer options for a new administration.

The bailout package gives the secretary of the Treasury great latitude to deal with financial markets and address the current credit crunch. Ostensibly, the department would have the authority to intervene directly and help homeowners.

In fact, at a news conference on Sept. 24, Obama said, "We should consider giving the government the authority to purchase mortgages directly instead of simply purchasing mortgage-backed securities."

Days later, in a news release, he said he would "encourage Treasury to study the option of buying individual mortgages like we did successfully in the 1930s."

"Since this beginning of this crisis, Barack Obama has demanded that any rescue plan must protect taxpayers and ensure that they share in any profit once the economy recovers, and he worked to include that principle in the plan that passed Congress," Obama economic adviser Jason Furman said in a statement Wednesday.

"John McCains plan to overpay for bad mortgages by handing taxpayer dollars over to big financial institutions is erratic policy-making at its worst, and its not the change we need to strengthen our economy, create new jobs and keep Americans in their homes," Furman said.



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