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McCain & Obama: Fixing the Housing Fiasco

Barak Obama, John McCainDisparities in age, race, beliefs and yes, solutions for the housing crisis separate America’s contenders for the Oval Office.

Republican John McCain and Democratic Barack Obama have only less than ten weeks to convince America that they deserve to be elected into office next year. Addressing critical issues through their respective platforms has been the key focus in their campaigns. This does not discount their efforts on dealing with questions regarding their age, race, political experience and Iraq.

The nation’s property market currently plagued by the subprime mortgage woes and swelling foreclosures is one of the toughest economic problems that the new president will face at the beginning of next year. Each candidate bears a strong list of solutions to balance the volatility of the market and to curb a further slowdown of the economy. McCain’s conservative strategies are heralded by the advocates of laissez faire, while Obama’s proposals earn the nods of those in favor of more federal intervention in the market.

Regulation

McCain has recommended the government’s less control in influencing the courses of the housing market, allowing more economic forces to act on it. If there will be some form of intervention however, it is to be focused solely on the homeowners who have struggled for past years to pay off their mortgage. Even the banking industry will only secure its support if a looming widespread risk is determined. Under the Justice Department, a mortgage-abuse task force shall be created to oversee suspicious mortgage activities.

Obama on the other hand, favors the Federal Reserve’s participation in the regulation of commercial and investment banks. An imposition of severe penalties for those who commit fraud in the mortgage business will be effected through increased funding in programs aimed at detecting and also preventing dubious lending businesses. Bankruptcy courts, where matters concerning the Federal Bankruptcy Act take proceedings, shall modify mortgage contracts and payments especially in the subprime mortgage industry. Current policies that take legal action against illegal practices shall now be adhered to.

Federal Funds

Both senators agree on the provision of a stimulus fund to salvage the housing market. McCain proposes a wider coverage of the budget to benefit more homeowners.

Obama has outlined his approval. A $10-billion support shall be given to the Foreclosure Prevention Fund which will provide financial counseling to Americans who are principal owners of their homes, strictly excluding investors and speculators in the market. Another $10 billion shall be allotted for the state and local governments which were hit the hardest by the housing debacle. This would discourage plans of forgoing their funding for special programs in other areas of development. The remaining $10 billion shall be allocated to supplement benefits for the unemployed.

Lenders

House Financial Services Chairman Barney Frank (D-Mass.) and Senate Banking Chairman Christopher Dodd (D-Conn.) proposed a plan to help stabilize the market. Lenders have to either buy or refinance existing mortgages where they must forgive part of the principal loan made by the borrowers and convert it to a 30-year, fixed rate loan that is backed up by the Federal Housing Authority (FHA). The borrowers will also share equity with the FHA when a sale or refinance of a home is made.

McCain’s plan rests on the Frank/Dodd proposal. He suggests that the lender and the government would each receive a portion of the equity from a borrower who gains from a sale of his home. Also, financial institutions will be required to raise capital reserves to ensure buffer funds during losses and to maintain the quality of their loans. Loans have to be written in simple language that is fully comprehensible to all borrowers.

Obama also supports the Frank/Dodd plan. He proposes the creation of the Homeowner Obligation Made Explicit (HOME) score to provide a simple comparable loan score for borrowers. Borrowers benefit by accessing current housing values at a speed up process. Obama will also continue to push for the Stop Fraud Act. In his official website, the senator has stated that this Act “provides the first federal definition of mortgage fraud, increases funding for federal and state law enforcement programs, creates new criminal penalties for mortgage professionals found guilty of fraud, and requires industry insiders to report suspicious activity”.

Borrowers

McCain stresses the fact that most borrowers who are now caught in the crisis have been duped into taking loans that they cannot possibly pay back. He calls for all borrowers to pass stricter lending standards to sieve those eligible to receive a loan from those most likely to default. Any false documents submitted for application shall be enough evidence to penalize the borrower. For those securing FHA loans, a higher down payment will now be required. He believes that this can “provide a responsible down payment of equity at the initial purchase of a home.”

Neighborworks America, a neighborhood redevelopment organization created to provide affordable housing opportunities, is publicly supported by McCain. He rallies for the organization’s long-running national programs in the real estate industry.

Obama on the other hand, has financial policies to provide long-term solutions. He will allot funds to help borrowers finance their mortgages but clarifies that only those proven to have been cheated with “liar loans” can qualify for the funding. It includes borrowers who are currently living in their primary homes holding a subprime mortgage loan after 2005. They will be eligible to trade their old loan for a newer one with a more affordable mortgage much like investors with several homes. The budget will be sourced from the proceeds of penalties against lenders who committed fraud.

Middle-class homeowners will receive a tax rebate through an appropriation of $20 billion. Those who do not itemize on their tax return will enjoy a 10 percent universal mortgage credit with an average estimated worth of $500 given to ten million Americans who earn less than $5,000 monthly.

Individuals who have filed for bankruptcy due to medical expenses will also be fully exempted from coverage under the Bankruptcy Law. Obama considers families who have not restored their finances after medicals costs should be given a preferential but just treatment to help them recuperate from monetary losses.

GSEs

Government Sponsored Enterprises (GSEs) are fully supported by both senators. McCain however believes that they should be privately owned but without the financial backing of the federal government. Other financial institutions can manage the GSEs rebound in the market instead. Obama meanwhile has expressed his support to financial reforms in these offices.

Although both of them support the American Housing Rescue and Foreclosure Prevention Act of 2008 that was recently approved to bail out Fannie Mae and Freddie Mac, McCain prefers a plan that would let borrowers refinance their borrowings into government-backed loans. Obama supports the original draft of the Act but is also proposing $20 billion in aid to help minimize foreclosures and prop up local community projects.

What America thinks

Critics praise McCain’s stand on asking the government to step back and allow the market to take its own course. Debra Saunders of San Francisco Chronicle praises his effort to discriminate against those borrowers who are likely to default. The National Review Online also gave a thumbs up sign to his insistence to increase the down payment on FHA mortgages.

Obama sacked his rival’s platform by stating this as a lack of definite plan to cure the crisis. He still remains dubious that McCain’s plan can actually solve the problems in the industry. Also, McCain’s proposal to let the GSEs become independent from government salvage would work against to more than 400,000 homeowners who will benefit from the American Housing Rescue and Foreclosure Act. Without it, they would still have been at the losing end of the situation.

Alex Pollock of American Enterprise Institute disparages Obama’s take on allowing industry insiders to report illegal activities. Also, he is against the senator’s proposal to allow bankruptcy courts to modify mortgage payments. It would actually discourage lenders in the process.

McCain sees Obama’s enormous budget for fixing the slump as ludicrous, taking away taxpayers’ money to rescue “irresponsible” borrowers and abusive lenders (which Obama has later clarified that these negligent borrowers and banks will be excluded no matter what). The National Review Online supports the same view also. The massive budget itself is seen by Saunders to intensify inflation in the long term.

Obama has also been accused in the “friends of Angelo” scandal that suspiciously provided low interest rates to Countrywide Financial Corp. officials as reported by Josh Gerstein in The New York Sun.

Though it is too safe to assume that American voters will cast their ballots based on these housing plans alone, considering that there are other issues that must be taken together, these presidential candidates’ take on the property market catastrophe in different strokes. Voters will be highly influenced with either more government regulation or a more conservative approach at the other spectrum. The elected president must ensure effective policies to anticipate the predictable housing cycle, which is ironically refuted by its sensitivity during the global economic crisis.

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