Good questions.

As I read EESA (the federal legislation), a “troubled asset” is defined to include mortgages, so in theory Treasury already has this power.

According his webpage, McCain proposes the following:

“The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes. By purchasing the existing, failing mortgages the McCain resurgence plan will eliminate uncertainty over defaults, support the value of mortgage-backed derivatives and alleviate risks that are freezing financial markets.”

http://www.johnmccain.com/Informing/Issues/b9af0d4c-9c0e-4a97-b27f-19df8cfec83d.htm

There are several problems with this (and with any attempt by Treasury to do what it apparently already has the power to do).

First, as you point out, the homeowners don’t **own the mortgages**–they **owe money** on them. They can’t sell their mortgages any more than I can “sell” my credit card bill (although if McCain’s buying, I’m selling). The mortgages are in many (perhaps most) cases **owned** by “trusts” that were formed by the financial institutions that created these structures in the first place.

So, the second problem is that it makes no sense to say that he would purchase the mortgages from the “servicers.” If he wants the goverment to buy mortgages, he has to go to the trusts that own them.

It is true that the trusts, via the servicers, could sell individual mortgages. But to get a sense of how complex and costly that would be, take a look at Countrywide’s Master Pooling and Servicing Agreement, which you can find here.

http://www.sec.gov/Archives/edgar/data/1340491/000090514805006045/efc5-2351_ex991.txt

On a quick read (and these docs are admittedly not quick reads, so I am doubtless missing some subtleties) it appears that Countrywide (as “Master Servicer”) could sell mortgages to the government, but only if it first purchased the mortgages itself. But it could only purchase from the trust at the FMV of the property and book it accordingly. It would presumably then sell the mortgage to the government. I think a big part of the problem is that we have no idea what the FMV of these properties is, and I suspect Countrywide (and its new parent, BofA) don’t want to take these assets onto their balance sheets.

Another possibility would be to amend the PSA, but that requires the support of lots of certificate (bond) holders. EESA already gives Treasury the power to purchase these securities (and thus, presumably, vote them to amend the trust indentures and PSAs). But I don’t see what’s new here, that it’s any more workable, or –most important–likely to make much difference to homeowners.

So, short answer: It’s not new, and it’s not clear practically speaking how this is would help homeowners. This is not a problem unique to McCain’s proposal. It is a problem with EESA. But Paulson did not sell EESA as a way to help homeowners, and it won’t have that effect. If it helps, it will do so by restoring a market for the securities at the back end–not the mortgages at the front end. That may help the capital markets, but it will obviously take time and faith.

A final point: McCain says he wants to bring government spending down. But the whole point of his “resurgence” would be to force taxpayers to absorb a $300 billion loss that should, in many cases, be absorbed by homeowners and/or banks. He makes no distinction between mortgages that might have been procured by borrower fraud or lender fraud, no distinction between prudent and imprudent parties, no attempt at all, in short, to avoid the moral hazard that the government’s largesse to date seems to be creating. If this is what a fiscal conservative looks like, I’d hate to see a liberal.

Durbin’s proposed bankruptcy amendment–that Republicans killed–would have addressed much of this, while saving taxpayers the cost of bailing out bad actors.

I don’t know who’s advising McCain on this stuff, but it certainly doesn’t bespeak good judgment. It sounds like yet another erratic, ill-considered response–cosmetic at best and more likely needlessly costly and impractical–to a very serious set of problems.

-Brett/NYU 3L

McCain’s site now describes his plan as directing the Treasury to “purchase” mortgages “directly from homeowners.” He says this will support the value of mortgage related CDS. This is an odd locution – since I believe a homeowner “owes” a mortgage rather than “owning” one. If McCain is referring to the government becoming a sort of co-signer on behalf of certain borrowers, is this even allowed under the current legislation? Do you think there is any downside to this approach?

McCain’s website now has a few paragraphs about his “Homeownership Resurgence Plan.” It mentions that he wants to purchase mortgages “directly from homeowners.” Do you think it’s possible he’s talking about the government assuming the mortgages as a sort of co-signer so that the related MBS and CDS stay afloat? Is this even possible under the current legislation?