To Bail Or Not to Bail

The editors at NRO point out that, although John McCain seems to have stated opposition to anything that resembles a mortgage bailout (in my view, correctly), it increasingly appears that he wants to effect a plan that is, well, a bailout.

[W]hat McCain said last week is disturbing. He proposed something he calls the HOME plan, under which distressed homeowners could apply to the government for help. If they qualify under the terms of the plan, their mortgage servicers would be required to write down and retire their current mortgage, and they would be given a new loan backed by the Federal Housing Administration.

The new, federally guaranteed loans would constitute a bailout for borrowers and lenders who knew or should have known the risks inherent in gambling on housing prices. The structure of McCain’s program would create a perverse incentive for those homeowners whose homes are currently worth less than the value of their mortgages to default on their payments in order to qualify for a write-down. Lenders who put people into loans they could not afford would be spared the burdens of foreclosure.

Investors, meanwhile, would see the contractual terms to which they agreed when they purchased mortgage debt rewritten by the government. The reputation of American debt-backed securities would suffer accordingly. Taxpayers would also lose out on the deal: They will be on the hook if the distressed borrowers who qualify for new FHA-backed loans can’t pay those back, either.

There’s an argument to be made that what McCain’s doing is at least politically savvy. It’s obvious that lots of people want something — anything — to be done here. But it’s not at all obvious that this is what should be done. And the politics of the situation aren’t as clear as the cries of "do something!" might make it seem. It’s not clear that the public wants to see a taxpayer funded bailout — for lenders or borrowers. Opposition, in fact, is pretty strong. So while it might end up working for him at the polls, McCain risks a lot playing both sides of the game here — and on policy grounds, he’s certainly wrong. (If you haven’t signed out petition opposing the bailout, go!)