BETHLEHEM, Pa. — Seeking to regain ground he's lost in the polls during the economic crisis, Republican John McCain returned to the campaign trail Wednesday trumpeting a mortgage bailout plan he unveiled in Tuesday night's presidential debate.
"We must go to the heart of the problem, and right now that problem is the housing crisis," McCain told a rally in a packed basketball arena at Lehigh University. "The dream of owning a home should not be crushed under the weight of a bad mortgage. The moment requires that the government act — and as president I intend to act quickly, and decisively."
McCain called for the federal government to become directly involved in the housing crisis by using the $700 billion bailout package recently passed by Congress and $300 billion from a new Federal Housing Administration fund that lawmakers approved last July. He'd direct the Treasury secretary to use those funds to buy troubled mortgage loans to help families stave off foreclosure.
Under the plan, homeowners would be allowed to stay in their houses and get more affordable government-backed mortgages.
The plan is McCain's latest effort to show that he's on top of economic issues. Recent polls show that voters think Democratic presidential candidate Barack Obama has a better grasp of economic issues.
But many economists objected that McCain's plan would prove incredibly costly to the government, while Obama's campaign called the proposal a bad policy that would reward the financial institutions that issued the bad mortgates.
"John McCain wants the government to massively overpay for mortgages in a plan that would guarantee taxpayers lose money, and put them at risk of losing even more if home values don't recover," Jason Furman, Obama's economic policy director, wrote in an e-mail to reporters. "
Furman called McCain's plan "erratic policy-making at its worst."
Many economists objected that McCain's plan has no requirement that banks must take a loss during the refinancing of distressed mortgages. A plan passed earlier by Congress would allow these mortgages to be reworked and put into a government-backed mortgage only if the bank agrees to reduce the present-day value of the home. In many parts of the country like California and Florida, home values are well below the value of the existing mortgage.
Alan Blinder, a former vice chairman of the Federal Reserve, said taking in mortgages at face value "seems wildly generous to the banks." Blinder, a Princeton University economist, has proposed a plan not unlike McCain's to "get in at the ground level" and address the root of what's ailing the U.S. economy. But Blinder would not purchase loans at face value.
McCain's chief economic adviser, Douglas Holtz-Eakin, told McClatchy that the proposed program would be limited to homeowners who are delinquent on their mortgages or have negative equity in their homes.
Fixing the housing mess isn't as simple as buying a bad loan. That was possible in the 1930's because banks held loans on their books. Today, most are sold into a secondary market where they are pooled with thousands of other loans and packaged into complex mortgage-backed securities.
It's hard to pull individual loans out of many of them, because some get special tax treatment, while others are divided into differing levels of return on investment, where investors around the world own portions of an individual loan.
These complex securities are one reason why loan modifications have gone so slowly, and some experts fear the government won't have an easier time of it.
"It's likely there will be litigation because it's disrupting the various contracts" that investors hold all over the globe, said Jerry Phelps, a lawyer specializing in banking law with Patton, Boggs in Dallas.
Obama, meanwhile, sought to put McCain on the defensive Wednesday, campaigning in Indiana, which hasn't supported a Democratic presidential candidate since 1964.
Addressing an estimated 21,000 people packed into muddy stands at the Indiana State Fairgrounds, Obama recalled Ronald Reagan's famous line in a 1980 debate against President Carter, when Reagan asked Americans whether they were better off than they were four years before.
Obama said: "At the pace things are going right now, you're going to have to ask whether you're better off than you were four weeks ago."
Obama told the audience that McCain's campaign was attacking his character to distract attention from the economy and added, "I can take four more weeks of John McCain's attacks, but America can't take four more years of John McCain's Bush policies."
McCain and his running mate Sarah Palin didn't attack Obama on character issues as hard Wednesday as they had since the weekend, when the campaign started taking a more negative approach, but surrogates who spoke for them did, questioning Obama's patriotism, honesty and intentions.
Bill Platt, the Republican chairman of Pennsylvania's Lehigh County, sought to portray Obama as un-American for not wearing a U.S. flag lapel pin, which he sometimes did not in the past. Obama has worn the pin virtually full-time since West Virginia's Democratic primary in May.
"We can teach Barack Obama a lesson not to mess with an American hero," Platt said.
Imploring local Republicans to volunteer for McCain's campaign, Platt at least twice referred to Obama by his full name, asking the crowd how they would feel waking up the day after the election and knowing "that Barack Hussein Obama is president."
As McCain addressed the rally, his campaign issued a statement condemning some of the pre-event speakers.
"We do not condone this inappropriate rhetoric which distracts from the real questions of judgment, character, and experience that voters will base their decisions on this November," Paul Lindsay, a campaign spokesman, said in an e-mail.
(Douglas reported from Pennsylvania, Talev from Indiana and Hall from Washington.)
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