Senator and Republican Presidential candidate John McCain gave a speech in Orange County, Calif. yesterday that has clearly vexed many mortgage industry participants.
In his remarks, he appeared to call for the industry to voluntarily offer zero percent mortgages to troubled borrowers:
We should also convene a meeting of the nation’s top mortgage lenders. Working together, they should pledge to provide maximum support and help to their cash-strapped, but credit worthy customers. They should pledge to do everything possible to keep families in their homes and businesses growing. Recall that immediately after September 11, 2001 General Motors stepped in to provide 0 percent financing as part of keeping the economy growing. We need a similar response by the mortgage lenders. They’ve been asking the government to help them out. I’m now calling upon them to help their customers, and their nation out. It’s time to help American families.
Frank James at the Baltimore Sun took the comments at face value, and noted that “McCain might also want to propose that we repeal the phenomenon called inflation, since that’s about as likely as mortgage bankers offering zero percent interest rates.”
McCain’s campaign managers, of course, are now hotly contesting the notion that McCain was actually suggesting free mortgages — instead, they say, he was only intending to illustrate how an industry came together to deliver a solution during a past crisis.
“If he had been suggesting zero-percent mortgages, don’t you think he’d just say that?” Brian Rogers, a McCain campaign spokesperson said yesterday.
(Pardon our confusion here, but we thought he just did.)
Hullaballoo over his zero-percent comments aside, McCain did make it clear that he’s against public intervention in the mortgage markets.
“I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers,” he said. “Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy.”
The analogy to GM might have some merit if he said homebuilders should consider offering 0% financing.
I’m surprised someone on Wall Street hasn’t come up with an idea to fund mortgages at below market rates in exchange for equity stakes in the future value of the underlying asset. The borrower would have to come up with at least a 10% downpayment and stay in the house for 7-10 years with a penalty if they moved earlier. The lender would get a percentage of the profit upon sale based on how much below market the interest rate was. Rex and Co. is doing something like this for existing homeowners looking to tap equity.
A 0% rate wouldn’t eliminate inflation, but it would help homeowners pay back a mortgage quicker. The banks still have their fractional reserve tool to inflate the money supply, and create principal amounts of new loans.
“Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy.” How wonderfully vague, and the door is open for the Federal Reserve to keep rewarding banks for moral hazard and passing the cost off onto the very people whose homes they are taking.
Mortgage companies taking an equity position in real estate sounds like a good idea, but it would never happen. Say Citi was a partial owner of a house you were renting out, and your tenant was injured and sued. You can bet that all owners of the house would be named in the lawsuit, and knowing how deep Citi’s pockets are would make the potential judgment much higher, and may end up costing the bank more in defending lawsuits (frivolous or not) than they’d get from increases in the value of the property.
I don’t for a moment think the really operative phrase there was “0% financing.”
The operative phrase was “after September 11, 2001.”
In other words, McCain seems to think that the current crisis is as much the financial industry’s fault as 9/11 was. Specifically, it wasn’t the financial industry’s fault at all–certainly not the Republican president or Congress’s fault or the the fault of regulators they appointed. It was one of those awful tragic things that happen to us that nobody could have predicted and that we could expect lenders to respond to by giving folks a break for a while.
Which means he’s even dumber about economics than you think.
Hold..on..a sec…still laughing….
Another very interesting thing in that speech that you haven’t mentioned is that McCain said FHA’s low downpayment minimum should be raised. That puts him at odds with the President, the Senate and House, who are working to complete legislation that would CUT FHA’s current downpayments from 3 percent to 1 1/2 percent (if the Senate’s number is adopted by conferees, which is what I understand is in the works.) The House voted overwhelmingly to cut FHA’s minimum DP to zero.
Okay.
All better.
Tanta got it right. 9/11 and the war is as all this poor guy running on. Economics…monetary policy…”systemic risk”….oh, please….
His other statements on the issue have been reasonable and against quick action or wholesale bailouts, he’s clearly not calling for 0% mortgages, he’s just saying that lenders need to step up voluntarily.
So the current moral hazard thinking is to motivate the biggest players to take the riskiest activities since their collapse would cause systemic failure and therefore government intervention? Why don’t we just legislate against anyone becoming that big and therefore we wouldn’t have to bail anyone out? Since bailouts are necessitated to save everyone, why don’t we confiscate the bonuses paid to Wall Street execs in December to pay for the Bear Stearn’s bailout. The numbers are strikingly close.
I’m not sure I am remembering correctly, but there was a big retail lender- not a traditional bank mind you- that was looking to offer a 0% teaser. I know one problem they had was trying to sell those loans on the secondary market.
But 0%- isn’t that what lenders basically did with 2/28’s?
I have a 10 year IO Fixed- so while the interest rate might not be 0, its almost kinda like it is.
Oh, and don’t care makers basically inflate the sales price so the 0% isn’t really 0%?
But, oh, yeah, McCain isn’t the strongest with numbers or the economy.