Fairly Conservative

Doug Holtz-Eakin, Senior Policy adviser to the McCain campaign, held a conference call earlier today. Here’s the transcript highlights:

“Senator McCain last night announced his initiative, the McCain Resurgence Plan, that has four very straightforward goals. Goal number one is to provide direct help to struggling homeowners making sure they can stay in their homes with a manageable mortgage, avoid foreclosures and the damaging impact that has on neighborhoods and property values in that area. It would also, in the process of refinancing, help them with their financial situation and, as a result, give some stability to the household spending in the overall economy.

“Second thing is it would provide, to the mortgage market, lower interest rates. If history was a guide, we’d see a spread of about 160 basis points above government interest rates to the mortgage market. That would put interest rates in the low five percent. Mortgage rates are above that right now. Providing this kind of financing would stabilize housing values and obviously take some stress off the pressures downward in the economy. Having a stabilized housing market would, in turn, combine with the purchase of these mortgages to stabilize the values that are underneath mortgage-backed securities and all the housing-related derivatives that have been plaguing the valuation of balance sheets in the financial sector. And so by starting with the homeowner and working up you accomplish some of the objectives of the financial stabilization plans that we’ve seen come out of Congress and proposed by the administration in recent weeks. Senator McCain beli eves this is exactly the right kind of policy: provide direct help to homeowners and, 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 real threats to the economy at this point it time.

“The initiative would rely on authorities that have been provided in recent months by the Congress. There’s $300 billion worth of refinance capacity at the FHA at this point. That can be combined with the statutory capacity at Fannie Mae and Freddie Mac, which are now owned by the federal government for all practical purposes, to purchase mortgages. If Fannie Mae or Freddie Mac bought 80% of the mortgage, you could leverage that $300 billion in financing tremendously. And there’s also the $700 billion that was provided to the Treasury by the Congress. There’s direct purchase authority in there that would allow to augment these as well, although, it may be useful to reserve that for other purposes.

“Mechanically the initiative is very simple. A homeowner would initiate the process by calling a mortgage broker or other originator and basically saying ‘I’d like to refinance my home.’ They would start the underwriting process, verify incomes, this is an opportunity as well to make sure the program has in it appropriate checks to make sure that government money is not being given to folks who are not primary homeowners, who don’t have adequate income, or otherwise, in the initial purchase of their home didn’t provide valid information. These authorities could then be used to retire the existing loan. The FHA would issue a guaranteed thirty year fixed-rate mortgage at a manageable interest rate. The homeowner would stay in the home, their financial burden would be relieved, the valuation of the existing loan would be resolved, there would no longer be a threat of default or diminished capacity to repay. That would stabilize financial markets, and t he taxpayers’ contribution would be, in some cases the difference between the values of those two loans, something which would be the necessity for taxpayer contribution.

“Senator McCain thinks this is the best way to go forward. He’s obviously been personally very concerned about the problems facing the economy. He has participated, as I think everyone on this call knows, extensively in the process of taking the initial proposal by the administration to directly purchase Wall Street securities shaping it in a way that it was both possible to get it through Congress in a bi-partisan fashion, and also had it augmented with the adequate taxpayer protections, some oversight and transparency. This would take the authorities that have now come through and further target them in a way that he thinks would accomplish the purposes of financial stabilization but also to provide some relief to homeowners, near-term stimulus to the overall economy, and lay out a path where he can then turn to his initiatives in taxes, in energy, healthcare, trade to provide job creation in the American economy and a path forward out of this ter rible crisis.”

You can listen to the call here.