By Richard Conniff, MSN MoneyThis article is part of a series on the candidates and the squeeze on the middle class. Click here to read about energy and health care issues.
In the middle of the biggest housing crisis since the Depression, presidential candidates John McCain and Barack Obama have had surprisingly little to say on the issue until recently. That's probably because neither saw a lot of big winners coming out of the housing mess. But despite some basic agreements on the fundamentals, the two candidates lean in opposite directions.
McCain has the conservative instinct for less government action, while Obama favors stronger regulatory oversight.
Sept. 2008: Obama on regulation and risk
Both candidates endorsed the Housing and Economic Recovery Act, signed into law in July, though McCain probably had to hold his nose. He has opposed having the government "bail out and reward those who act irresponsibly, whether they are big banks or small borrowers."
March 2008: McCain on financial bailout
The new law seems to risk doing both: It gives the nation's two giant mortgage lenders, Fannie Mae and Freddie Mac, a taxpayer-backed guarantee on a vast portfolio of shaky loans. It also includes a five-year program to help 400,000 struggling homeowners refinance their mortgages through the Federal Housing Authority. In a nod to responsibility, you will have to take a loss on those mortgages if you're a lender. If you're a rescued homeowner, you'll have to share future gains in the value of your home with the FHA.
The candidates supported the emergency measures to save the financial system from collapse and to help millions of Americans in danger of losing their homes.
Rates soaring to 14%?
Then both candidates, along with much of the rest of the country, held their noses to support the Bush administration's $700 billion bailout of the financial industry.
Tell us: Does the financial crisis affect your vote?
With the details of the legislation still being worked out, it's unclear how the middle class will fare.
No matter who gets elected, the new leader will likely preside over a continuation of the wave of foreclosures through 2009 and even into 2010. That's because loans made at the end of the subprime-mortgage bubble in 2007 are still resetting from their original teaser rates. In a troubled economy, many borrowers will be unable to make their new payments.
The new president will need to get the FHA homeowner rescue program fully geared up.
He may also need to take action in support of the program if lenders size it up and decide not to play along, or if a large number of borrowers get back into trouble with their FHA loans.
The new president will also have to manage the terms of the Fannie Mae/Freddie Mac bailout.
Clearly the candidates would bring very different perspectives to those challenges. But lately, the ideological differences between them have tended to blur.
McCain at first seemed more likely to take a conservative, go-slow approach. He originally wanted loans to go only to homeowners who could prove their creditworthiness at the time of the original loan. Obama was inclined to overlook poor credit, as long as borrowers could show their ability to make the new payments now. But McCain has recently proposed an aggressive plan for the government to buy up $300 billion worth of distressed mortgages at face value. The government would give the homeowners fixed-rate 30-year mortgages at the current, reduced value of their homes. The proposal has attracted widespread criticism, partly because of practical difficulties in buying up loans that the original lenders have sold off into large investment pools. The Obama campaign has attacked the plan for putting the cost on taxpayers, instead of having banks take the loss, as the July law provided.
Graphic: McCain on 7 top issues for the middle class
Obama also has a major new proposal. Reversing an earlier stand, he wants banks that benefit from the federal bailout to accept a three-month moratorium on foreclosures for homeowners making a good-faith effort to handle their mortgage commitments. But critics wonder what would happen after 90 days.
Graphic: Obama on 7 top issues for the middle class
What about the causes of the housing crisis and proposals to prevent it from happening again? Despite conservative and liberal labels, the differences between the two candidates are not glaring.
McCain has declared that "Wall Street is the villain" in the subprime-lending crisis and has called for a Justice Department task force to investigate abusive lending practices. Obama has proposed tougher criminal penalties for mortgage fraud and a $40 million increase in enforcement spending. He has also promised to modernize the entire federal financial regulatory system, to reduce the influence of special interests and identify risk in a timely manner.
Both candidates have called for more transparency in lending, which means providing documents the average borrower can understand. Right now, when you go to a mortgage closing, you're not likely to read the typical 80-page mortgage package, and you probably wouldn't know where to find the crucial details if you tried. One possible fix, proposed by Alex Pollock of the American Enterprise Institute, is a one-page cover sheet listing basic mortgage facts, including the borrower's monthly income and the percentage of that income needed for housing costs once the loan hits its maximum interest rate.
What else could the new president do to help the middle class?
Obama wants bankruptcy judges to be able to adjust the terms of a mortgage on a primary residence, as they now do with all other debt. Lenders argue that closing this loophole would force them to increase mortgage rates all around.
Obama also wants to allow about 10 million homeowners to take a tax credit equal to 10% of their mortgage interest, up to $800, meaning a direct reduction their taxes.
Homeowners can, of course, already deduct the full amounts of their mortgage interest; the hitch is that they have to itemize their deductions to get that benefit. More than 98% of homeowners with incomes above $125,000 currently itemize, while only 23% of homeowners with incomes below $40,000 do. So the tax credit would extend the benefit to middle- and lower-income Americans.
Reality check: The Universal Mortgage Credit would be a great idea if it replaced the mortgage-interest deduction, according to the nonpartisan Tax Policy Center. But piling it on top of "the already extensive list of tax incentives for homeowners" just means one more distortion of the housing market, the center suggests. Having to figure out whether to take the credit or the deduction could also complicate taxes. As an alternative, the Tax Policy Center suggests preserving the existing deduction -- a sacred thing in U.S. politics -- but limiting it to the first $400,000 of a mortgage, down from $1 million now. That would still give people an incentive to buy a home -- but not necessarily a really big home.
McCain's big idea is to privatize Fannie Mae and Freddie Mac after the current crisis has passed. These lenders long operated like private companies, with limited government oversight. But they had federal backing, which means they could borrow funds at a discount, typically almost half a percentage point off normal rates. Critics say much of the discount ended up as profit and contend the benefit to borrowers was small, knocking a 7% loan down to somewhere between 6.75% and 6.93%.
To put it another way, let's consider a homeowner with a 30-year mortgage for $200,000. The existing framework probably saved the homeowner between $10 and $30 a month -- maybe enough for a night out at McDonald's or Burger King.
Before the Fannie and Freddie takeovers, McCain asserted that the two lenders have "stayed in business, grown and profited mightily by showering money on lobbyists and favors on the Washington establishment." He promised to "make them go away." The idea was not merely to end federal backing but to shrink Fannie and Freddie so the mortgage market would no longer be dominated by any lender deemed "too big to let fail," whether private or government-sponsored.
Reality check: Liberal and conservative economists alike argue that Freddie and Fannie have outlived their usefulness. But McCain's point about their lobbying power is valid, suggesting they may not go away quietly. One
recent report identified 20 McCain fundraisers and several Obama insiders who have worked as lobbyists for the two lenders. The federal takeover means no more budget for lobbying.
But a little-discussed provision of the Housing and Economic Recovery Act creates a powerful rationale for maintaining the link between the companies and the federal government: Beginning in 2010, the new National Housing Trust Fund will tap a portion of Fannie Mae and Freddie Mac profits, assuming there are any, as a funding source for affordable housing. On that basis, affordable housing is now expected to enjoy $300 million to $700 million a year in automatic funding.
And this leads to one final housing issue that the candidates aren't talking about much: rental housing. The goal of homeownership is deeply embedded in American culture and in U.S. housing policy. It's why we have a mortgage-interest deduction that will cost the U.S. Treasury $95 billion this year. But critics note that relentlessly pushing people into homeownership hasn't always worked out so well. Steven Hill of the New America Foundation thinks the government should increase support for nonprofit developers and otherwise do more for the 30% of the population in rental housing.
Pollock, of the American Enterprise Institute, replies that the real-estate bust is already taking care of the problem, returning houses and apartments to the rental market.
And the candidates? As with other housing issues, they aren't saying much.
Return to Middle Class Crunch series
Updated Oct. 17, 2008
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