The reasons for my confusion have been made clear by Politico: "McCain changes homeowner plan."
Overnight, they went from requiring lenders to take a loss to offering to pay them. A similar thing happened during the day yesterday. In the morning, we heard Holtz-Eakin suggest:
"The taxpayers' contribution would be, in some cases, the difference between the values of those two loans." -- Doug Holtz -Eakin, conference call.And then he told the AP that he would simply pay the original value:
To do so, the government would pay the full face-value of the distressed mortgages, Holtz-Eakin said.
Which is to say he's gone from forcing lenders to take a loss to being willing to negotiate with lenders over the refinancing price to simply buying the original value of the mortgage. No more defense from me. But there still isn't any effective plan out there to help prevent foreclosures. There are simply optional authorities that don't provide good incentives for participation of the government or lenders. It's a good sign that Secretary Paulson is emphasizing the use of equity stakes in banks as opposed to purchasing the toxic securities outright at inflated prices, but that still doesn't have direct effect on people who are losing their homes, which accelerates the drop in value of those bad assets and hurts the economy in myriad other ways.
The politics behind this, of course, was an imperative for McCain to differentiate himself from both Bush and Obama. It's unlikely this is a policy a President McCain would ever pursue.
--Tim Fernholz
