So here is the nub of McCain’s plan to renegotiate mortgages of homeowners who are behind on payments/in foreclosure. The idea. Force mortgage companies to refinance the mortgages at the lower value of the property, thereby allowing folks to stay in their homes and pay less. The difference in value would be assumed by taxpayers. Yes, that’s right, taxpayers would assume the burden, but neither the homeowner nor the mortgage company (i.e. bank) would take any responsibility. (To be fair, if the home is resold later–say in ten years–taxpayers could share in any profit.)
The problem: lack of anyone taking any responsibility for their poor decisions–either the homeowner or the corporation. This encourages the continued development of a so-called “moral hazard” in which people and institutions bear can behave irresponsibly because they will be bailed out.
A better solution? How about the mortgage company take the hit? After all, they made the bad loan and it is better to receive something than nothing. And, at the same time, how about have the federal government work to create a lower interest rate on the property for the homeowner (which it might subsidize for a predetermined period of time) but that the government does not completely relieve the individuals of their responsibility?
Is my idea feasible? Actually, yes. Bank of America just did this with all of Countrywide’s bad loans, which it assumed in July when BoA bought Countrywide.