McCain made a bizarre attempt to outflank Obama from the left on the bailout by suggesting that the government should directly buy shaky mortgages (instead of buying the various financial instruments derived from these mortgages). There a number of significant problems with this- the first being an enormous expansion of government bureaucracy, with 20% or so of home mortgages being owned by HUD or a similar bureaucracy, which would have to massively scale up very quickly in order to take on the task, and would lack the knowledge of local conditions that lenders on the ground in the affected communities have.
The second problem is articulated by Mark Steyn-
Will massive government intervention restore the health of the American property market? It’s not clear to me why the government needs to buy up all these mortgages. We talk of “keeping people in their homes”, but in what sense are they “their homes”? Many of these home “owners” obtained such ridiculous mortgages that they have minimal equity in them: Losing “their homes” is, in that sense, little more in cash terms than losing the security deposit on your rental apartment. Listening to all these proposed government interventions designed to stave off reality, I’d rather leave it to the market.
Matt Yglesias defends McCain's plan-
This situation is bad for all homeowners. You don’t want to be in the position of looking to sell your home in Miami order to take that new job in San Jose at a time when Miami is littered with foreclosed-on homes that nobody wants to buy because, hey, only so many people want to move to Miami.
Meanwhile, in the long run the situation rebalances. A bunch of people who bought homes they can’t afford lose their homes. And a bunch of homes whose occupants have been kicked out plummet in value. Suddenly the homes that people previously couldn’t afford are affordable, and everyone who was previously without a home winds up back in one, with houses having re-adjusted downward in value. There are so many people in the country and so many homes to occupy, so one way or another the great wheel of history will turn and people will wind up living in the houses. Mass rewriting of problematic mortgages will produce the same outcome as simply letting history run its course, but if done right it ought to get us to that outcome more smoothly (without, for example, producing a reverse-bubble in which housing prices fall too low) and with less inconvenience.
The fact here, though, is that having homes plummet in value isn't particularly bad in the short term- a low-value home isn't any worse to live in than a high value home. The majority of situations where homeowners need to sell their homes and pull the value out is when they're moving. But if home prices are depressed around the country, then the lower value pulled out of a current home should be enough to buy a depressed-price home somewhere else. Granted it would make it more difficult for people to use the equity on their homes as a credit card to buy other things, but in a macro sense that's fine because using home equity as a line of credit is part of what got us into this problem in the first place. In the meantime, folks whose home prices are depressed will get a break in their property taxes too- and for many retired folks who've been responsible and paid off their mortgages, their biggest fear is that they can't pay property taxes which had risen because of the spike in home values.
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