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McCain On the Mortgage Crisis

Borrowers share blame with lenders, investors

March 26, 2008


Sen. John McCain offered a comprehensive explanation of how the current credit crisis occurred. He noted borrowers, as well as lenders and investors, share responsibility for the crisis and called for higher down payments and more help from lenders.

The Arizona Republican presidential candidate addressed the issue one day after Sen. Hillary Clinton proposed her own plan for the housing problem.

While Clinton wants a 90-day foreclosure moratorium, a five-year rate freeze on subprime mortgages and a $30 billion fund for communities to buy foreclosed properties, McCain said he won't "play election year politics with the housing crisis."

"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," McCain said yesterday to the Orange County Hispanic Small Business Roundtable in Santa Ana, Calif., according to a transcript of his prepared statement. "Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy."

McCain, who acknowledged the latest round of turmoil in the financial markets, did his best to explain what he believed to be the causes of the mortgage crisis in the U.S. He said irrational speculators helped create the housing bubble that saw prices increase 15 percent each year from 2001 to 2006 and compared the collapse to the technology bubble of the late 1990s.

"Our system of market checks and balances did not correct this until the bubble burst," the senator said.

He explained lenders gained a false sense of security from rising home prices and lowered their lending standards. They ignored borrowers' repayment ability and stopped asking for reasonable down payments.

In addition, investors who didn't fully understand the complex instruments they were buying played a role. The lack of transparency in these instruments, which were primarily off the balance sheets and hidden from scrutiny, only made it more difficult for investors to accurately quantify the risk. By the time losses started hitting, a crisis of confidence was spawned and banks no longer trusted each other.

Earlier this year, he expressed concern over how forced modifications would impact the investor class, noting their motivation to invest in U.S. mortgages would be jeopardized if government changes the terms of a contract.

McCain also placed some blame with borrowers, who bought homes they couldn't afford and bet that rising prices would enable them to refinance later at better rates. He noted that out of 80 million U.S. homeowners, only 55 million have a mortgage -- with 51 million doing what is necessary to maintain their mortgages, including skipping vacations and working second jobs.

"That leaves us with a puzzling situation: how could 4 million mortgages cause this much trouble for us all?"

McCain said any assistance for borrowers should be temporary, and no assistance should be given to speculators who bought properties as rentals or second homes. Additionally, help should not reward irresponsible borrowers at the expense of responsible borrowers.

"I will consider any and all proposals based on their cost and benefits," he said. "In this crisis, as in all I may face in the future, I will not allow dogma to override common sense."

He noted that government assistance should be accompanied by reforms that include transparency and accountability. And while borrowers should clearly understand the terms of their loans, they should also be penalized when they lie on their applications.

McCain said he opposes reducing down payments on loans insured by the Federal Housing Administration and, in fact, supports raising them. He also indicated mortgages purchased by Fannie Mae and Freddie Mac should always include an investment by the borrower.

The candidate called on lenders to do more to help cash-strapped credit-worthy borrowers. He highlighted zero interest loans offered by General Motors to help the economy immediately after September 11, 2001.

Democrats fired back at McCain's comments.

Democratic National Committee Chairman Howard Dean suggested McCain does not quite understand the economy and how Americans are being affected by the mortgage crisis that continues to grow, according to an announcement.

"Instead of offering a concrete plan to address the crisis at all levels, McCain promised to take the same hands-off approach that President Bush used to lead us into this crisis," Dean said. "While John McCain promises a third Bush term, Democrats are offering real solutions to help the millions of American families who played by the rules and are still fighting to keep their homes."

Natalie Merrill is a staff writer for MortgageDaily.com with a Journalism degree from Southern Methodist University.

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