John McCain’s mortgage bailout

“Government does not solve problems; it subsidizes them.” – Ronald Reagan

In the second presidential debate, John McCain proposed that the government buy up people’s mortgages and reevaluate the value of their homes and renegotiate their loan terms to the new value. Obviously the mere concept disturbs fiscal conservatives such as myself, but it appeals to many of the moderates who don’t make politics a regular part of their lives. Why did he propose this? Is it just a political gimmick, or does he really believe it would be helpful? Lets take a closer look…

First let’s look at the scale of the plan; We need to know who will it help in order to know how much will it cost us. According to his website, “No taxpayer money should bail out real estate speculators or financial market participants who failed to perform due diligence in assessing credit risks.” “Eligibility: Holders of a sub-prime mortgage taken after 2005 who live in their home (primary residence only); can prove creditworthiness at the time of the original loan; are either delinquent, in arrears on payments, facing a reset or otherwise demonstrate that they will be unable to continue to meet their mortgage obligations; and can meet the terms of a new 30 year fixed-rate mortgage on the existing home.” Well, that pretty much rules out everyone. How many people are there in the country who bought their home in the last three years, are living in it, put down a good down payment, proved they could afford it, then couldn’t afford it, then went delinquent, weren’t kicked out, but could afford it if it were reevaluated to the current cost? I’m calling gimmick on this one, but just for the sake of argument, lets say a good size portion of the country qualify and decide to take advantage of this. What effect would it have on the rest of us?

Most people when selling a house make some efforts to clean it up and cover any defects in order to get a higher appraisal. In this situation we would see a reversal. People would let their weeds grow, throw some dirt on the wall, point out water stains and rot, and generally try to get the house appraised as low as possible in order to owe less. This difference in appraisal value comes directly out of our pockets, not in the form of taxes, since politicians no longer have the balls to raise taxes to pay for their programs, but out of devaluation of the money in your pocket. Adding to this, property taxes are calculated based on the value of your home. This would further reduce the income of the government and add to the deficit. The very same homeowners would then clean up their house and sell it at the real value, or they would, if there were anyone to buy it. Potentially even worse, if this plan were put into action, it would send a message to homeowners that if they wanted in on the bailout, they should just stop paying their mortgage. This has the potential for a catastrophic cascade that would only make things worse. None of this has served to make people more likely to be able to get a home loan and buy a house, so the housing market hasn’t really improved. All we have really accomplished is lower taxes while we  increased spending.