From Homescape

The day after Sen. Hillary Clinton delivered a major policy address on the housing crisis, Republican presidential candidate John McCain decided to ratchet up his rhetoric on the issue and toss in his million-dollar idea into the boxing ring. But McCain’s proposal lacks the one-two-punch needed to knock out today’s housing problems.

McCain's solution

McCain is calling for a meeting of the nation’s top mortgage lenders as part of a solution to the rise in home foreclosures, saying the bankers should look to the example of General Motors, which offered zero-percent financing on new cars after the terrorist attacks of September 11, 2001.

The Arizona senator has voiced his opposition towards a major government bailout, arguing that tax payers should not have to be held responsible for the irresponsible actions of mortgage brokers, lenders, Wall Street financiers and home buyers. The proposal drew immediate criticism from economists, who said the situation with GM in 2001 is not comparable to the current crisis.

David Henderson, an economist and research fellow at Stanford University’s Hoover Institution, told the The New York Sun, that “GM’s initiative was effectively a discount and did not come from government pressure.”

Other economists pointed out that GM’s financing plan served the company’s interest as much, if not more, than it did the nation’s, by enabling it to sell off excess inventory and make way for the following year’s models.

“In a capitalistic economy, it’s the profit motive that matters most,” John Lonski, the chief economist at Moody’s Investors Service, told The Sun.

Down payment dilema

McCain is placing blame for the housing crisis on lenders who let standards fall too low and on borrowers who bought homes they couldn’t afford. He pointed to the “zero down” payments as a major contributor to the subprime mortgage mess, and called for more transparency, “so that every borrower knows exactly what he is agreeing to and where every lender is required to meet the highest standards of ethical behavior.”

While McCain’s GM solution for the housing crisis may be way off the mark, I think his call for stricter regulations for lenders to require significant down payments from borrowers is a key component that Clinton’s proposal doesn’t address.

If home prices fall 10 to 15 percent — which is what has happened in states such as Florida and California — after a borrower buys his house without a 20 percent down payment, he’ll quickly find himself “upside down,” and he’ll be owing more on his home than it’s worth. Due to widespread home depreciation across the country, some economists say one out of 10 homeowners could now be upside-down.

If you put 20 percent down and home values declined 10 to 15 percent, you will still have a safety net with a little bit of equity left in your home. Homeowners without that cushion could end up selling their home for less than they bought it for or maybe be forced into foreclosure. You’re playing Russian roulette with your home if you opt out of a down payment.

With the faltering economy as a forefront issue of the presidential election, McCain’s latest proposal reveals his weakness on economic policies, an area he openly admits to being less knowledgeable about compared to military and foreign affairs. But I commend him for addressing the down payment issue, which is often omitted from political speeches, because it doesn’t carry with it the glitzy headline of a $30 billion rescue fund.

Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.