A couple of posters have mentioned this solution in other threads. I saw it posted by different people on different blogs. So, I don’t know the original author. I, too, am surprised that McCain would spout something so obviously and blantantly populist, and I’m surprised that Obama’s UChicago econ team didn’t pounce all over it.
In theory, it sounds nice, but it won’t work-- well – effectively. As I understand it, the problem is largely liquidity, fueling a credit crisis, because no one knows how to value the underlying securities/assets (homes and property) from which these bonds/mbs/cdos/etc. were derived. So, the government is saying, let’s negotiate at fair market value with homeowners so that they can afford their homes.
The first problem is logistical. Joe Sixpack’s mortgage has been sliced and diced in any number of derivatives, sold and re-sold. We won’t know where that payment is going to. We won’t know who’s security is now stable.
Second, if the government is going to negotiate at FMV, what does the government know about the housing prices? A massive, inefficient bureaucracy will have to be established to accommodate this endeavor, further decreasing the value of the transaction. The money they’re (or rather, we, as taxpayers) investing is already at a loss.
Thirdly, speaking of FMV and depreciated values, we are in a housing slump now. FMV is going to be low, which means that these securities are now going to be lower than previously thought, which again puts the whole idea of value of the security in jeopardy. I haven’t thought this point out that thoroughly, but perhaps this can be relieved by a one-time tax write-off.
Fourth, if Joe Sixpack couldn’t afford the subprime mortgage (or otherwise didn’t qualify), he’s not going to qualify for a 30 year fixed, or be able to make payments. It also rewards, unfairly, risky behavior. Not everyone who took out a subprime loan is a victim of predatory loans (however loosely that is defined). People should realize the consequences of their risky behavior.
Lastly, home values are based on comparables. Home values will be lower now because people were lucky enough to be saved by the government in an otherwise stable neighborhood. Those responsible homeowners should not have to suffer depressed home values because someone took out a risky loan and failed.