McCain mortgage plan would bail out borrowers

When the mortgage crisis first ballooned, Obama offered a plan that included aggressive regulation of financial institutions, relief for homeowners and a $30-billion economic stimulus package. McCain criticized it as a "multibillion-dollar bailout for big banks and speculators" and said, "There is a tendency for liberals to seek big government programs that sock it to American taxpayers while failing to solve the very real problems we face."

After he was criticized for downplaying the government's role in responding to the crisis, he changed course. He proposed spending up to $10 billion for government-backed mortgages for "well-meaning, deserving homeowners" facing foreclosure.

According to the outline of McCain's newest proposal, the federal government would pay borrowers and lenders in full, regardless of how wise or fair the original transaction was. Lenders would be able to remove the bad mortgages from their balance sheets, and borrowers would be able to refinance into government-guaranteed loans. Mortgage holders would have to prove they lived in the home and had good credit at the time of the original loan.

This approach has been largely rejected by both Democrats and Republicans because it would be likely to reward the kind of bad lending and borrowing practices that caused the housing crisis while doing little to help stretched but conscientious homeowners.

By contrast, the housing bill passed by Congress over the summer, and which went into effect Oct. 1, required lenders to take a loss by writing down the principal on troubled mortgages to 85% of the house's current value. Borrowers with adequate incomes and credit records would then qualify for refinanced mortgages from new lenders.

Government funds were used only to help finance mortgage insurance for the new loans; cost estimate for taxpayers was roughly $20 billion.

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bob.drogin@latimes.com

maura.reynolds@latimes.com