McCain's Mortgage Plan: The Response

Is Sen. John McCain's plan to help homeowners illegal? He wants the government to buy mortgages directly from banks at face value and then renegotiate their terms. Many economically savvy readers, as well as the Obama campaign, contend that the TARP explicitly prohibits the government from purchasing most mortgages at face value because to do so would violate the law's taxpayer protection mechanisms.  Here, in full, is the McCain campaign's response:

This line of argument is flawed in four specific ways:

1.)    These strictures are stated to apply only to programs "established under this section" -  in sec. 101. As such, they do not apply to sec. 109, which states that, Upon any request arising under existing investment contracts, the Secretary shall consent, where appropriate, and considering net present value to the taxpayer, to reasonable requests for loss mitigation measures, including term extensions, rate reductions, principal write downs, increases in the proportion of loans within a trust or other structure allowed to be modified, or removal of other limitation on modifications." Moreover sec 110.  "Assistance to Homeowners." requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures and requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer. This authority granted in sections 109 and 110 is entirely consistent with the Homeownership Resurgence Plan, and nullifies their line of attack.

2.)    Sec 101e, does not apply to the separate authority granted to the FHFA in the Housing to borrow, essentially up to the debt limit, to buy troubled assets as proposed in the Homeownership Resurgence Plan, nor does it apply to the FHA's $300 billion authority to guarantee mortgages, also passed in the housing bill.

3.)    Third, sec. 101e, should be read in its entirety. Such a reading would reveal that "This subsection does not apply to troubled assets acquired in a merger or acquisition, or a purchase of assets from a financial institution in conservatorship or receivership, or that has initiated bankruptcy proceedings under title 11, United States Code." This explicitly exempts the Secretary from these restrictions when buying troubled mortgages held by Fannie and Freddie, an activity that is consistent with the Homeownership Resurgence Plan.

4.)    Sec 101e directs the Secretary to  take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section. This section clearly delegates broad authority to the Secretary to determine what relief is necessary and what counts as unjust enrichment. As such, to the extent the Secretary reasonably deems that the practice of purchasing mortgages at a given price to restore economic stability is necessary, the express purpose of the Act, then those activities would not constitute unjust enrichment under the Secretary's discretion.

There is clearly authority for the activities proposed under the Homeownership Resurgence Plan granted by the recent passage of the Housing bill and the emergency economic stabilization act - both of which Senator Obama supported. It therefore did not surprise when Senator Obama attempted to claim ownership for this proposal the night it was announced. Regrettably, Senator Obama, has subsequently decided that joining Senator McCain in proposing immediate, substantial, and targeted relief, ran contrary to his political ambitions and therefore has resorted to having his legal team attempt to concoct arguments to impede a constructive dialogue with the American people on how best to restore strength to our economy. This is yet another example of the different approaches Senators McCain and Obama take to solving America's problems - Senator McCain takes action, Senator Obama stands in the way (much like the case of reform to Fannie Mae and Freddie Mac) of a solution and offers nothing but rhetoric in its place.