At the Oct. 7 debate, Sen. McCain introduced a mortgage buyback scheme whose purported purpose is helping mortgagees. It has many problems.
- Each individual mortgage has been sliced into a thousand or so slivers, and the slivers from vast numbers of original mortgages have been aggregated into a large number of separate securities, sold to different parties around the country and around the world. There is no longer a single document corresponding to a single mortgagee that the U.S. Treasury could buy.
- Further, the game has become even more complicated by giving certain classes of securities prioritized claim to the revenue flow from mortgage payments. How do we adjudicate the rival claims of owners of different classes of securities?
- As for the goal of aiding mortgagees, some mortgagees are more deserving of aid than others. Should someone who speculated on housing prices going up by buying multiple houses, perhaps with no down payment, be bailed out? What social goal is served by bailing that speculator out? You only want to help the family who actually made a down payment, and has lost their equity and their house.
Those are practical administrative problems, and also problems of social justice. There are other more profound problems. By buying the paper, presumably valuing it at its original worth, McCain is rescuing not the mortgagee, but the holder of the paper. This puts the entire cost of the mortgage market disaster on the taxpayer -- there is no sharing of liability, and the perpetrators of the disaster get off free. At least the way Paulson and Bernanke have been running things, most of the damage is borne by the stockholders of the companies responsible for the mess.
However, bad as these problems are, they are not the central problem. The central flaw in McCain's idea is the nutty and impossible goal of reinflating housing prices up to their heights at the top of the bubble. That price bubble was the main reason we're in this mess. You can't inflate house prices while shrinking the ability of the middle class to pay those prices. The painless solution before the bubble got out of hand would have been to maintain historic standards for mortgage credit. If this had been done, there would have been no bubble. It is absurd to think you can solve the problem by having Uncle Sam buy up the mortgages at bubble values, so that the banks could continue selling unsound mortgages and bring back those good old bubble days.