WASHINGTON — Sen. John McCain — who just two weeks ago resisted broader intervention to stem the housing crisis — changed tack Thursday, proposing a plan that would ask the government to insure delinquent subprime loans.
The Republican presidential nominee called for the creation of a "HOME plan" that would let subprime borrowers trade in their loans for 30-year, fixed-rate mortgages backed by the Federal Housing Administration.
His plan is similar in concept to rival proposals from the Bush administration and Democratic leaders, both of which have already drawn fire from congressional Republicans, who fear it would expose taxpayers to significant losses. Like those plans, Sen. McCain's would ask lenders to take a haircut by writing down the mortgages below current market values.
But Sen. McCain and his aides said the Arizona lawmaker's plan improves on existing proposals and is needed to fix the housing crisis.
The plan "offers every deserving American family or homeowner the opportunity to trade a burdensome mortgage for a manageable loan that reflects the market value of their home," Sen. McCain said during a speech in Brooklyn. "We will combine the power of government and the private sector to find immediate solutions for deserving American homeowners."
All the proposals turn on expanding the FHA, a government mortgage insurance program for low- and moderate-income borrowers run by the Department of Housing and Urban Development. Under Sen. McCain's plan, holders of subprime mortgages originated after 2005 who live in their homes and can prove creditworthiness would be eligible. Borrowers would also have to be delinquent or in arrears on payments, facing an interest rate reset, or otherwise demonstrate that they would be unable to meet their mortgage obligations.
Borrowers could pick up an application form at a post office, and the FHA would contact the mortgage servicers of people certified as eligible by the agency. The mortgage servicer would write down and retire the existing loan, which would be replaced by an FHA-guaranteed loan from a lending institution, Sen. McCain's campaign said.
Sen. McCain's economic advisers said the plan was different from legislation being pushed by House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Chris Dodd because it would be driven by borrowers, not lenders.
The Frank-Dodd plans "basically [are] focused on lenders' coming forward," Carly Fiorina, the former chief executive of Hewlett-Packard who is now advising the McCain campaign, said on a conference call with reporters. "The consequence of that is that the lenders frankly will go to the federal government for help on their most problematic loans and keep the most profitable loans for themselves, which may or may not be what helps homeowners the most."
Under Rep. Frank's draft bill, lenders and servicers could, as an alternative to foreclosure, write down mortgages for amounts greater than a property's market value to 85% of their appraised value, then have the FHA insure the loans.
Sen. McCain's advisers said he was not calling for so steep a haircut. Under his plan, lenders would be asked to write down loans to 90% of their appraised value.
By contrast, the Bush administration's proposed extension of the FHA Secure Program would require lenders to write down principal within a loan-to-value range of 90% to 97%.
Though all three plans share traits, Sen. McCain's proposal and the Frank-Dodd plans would both face an uphill battle in the Senate. (See related story, page 3.) The Bush administration says it plans to make its changes to FHA Secure through the regulatory process.
On Thursday, Sen. McCain also called for the creation of a Justice Department task force to "aggressively investigate potential criminal wrongdoing in the mortgage lending and securitization industry."
Sen. McCain's views on the housing crisis appear to be evolving quickly. In a speech two weeks ago in California, he outlined his views on the housing crisis for the first time. Though focusing on the need to help "deserving homeowners," he offered few details and declared that "it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers."
Thursday's speech, though, appeared aimed at showing that Sen. McCain now thinks a solution is needed beyond what other Republicans have offered.
It also brought him closer to his Democratic presidential rivals, Sen. Barack Obama and Sen. Hillary Clinton. Both lawmakers support the Frank-Dodd plans and have said Congress should do much more to alleviate the housing crisis.
Still, Sen. Clinton criticized Sen. McCain on Thursday for reversing himself. "Just two weeks ago, Senator McCain said he'd rather do nothing than something about the housing crisis and attacked my plan with tired right-wing talking points," the New York Democrat said in a press release. "Today, it looks like he's proposing a warmed over, half-hearted version of the very plan he criticized."
