McCain's housing plan, cont.

Via Andrew Leonard in Salon, Georgetown law professor Adam Levitin, a specialist in bankruptcy and commercial law who has been studying proposals like McCain's new "American Homeownership Resurgence Plan", comments:

The McCain plan cannot work. The vast majority (80 percent+) of residential mortgages are securitized. The government cannot purchase mortgages directly out of securitization pools. There are a limited number of ways to actually get around the securitization problem:

1. Refi the mortgages directly, which would involve paying 100 percent of face value.

2. Buy up ALL the RMBS and CDOs and CDO2s, which will be prohibitively expensive and will result in paying close to face value.

3. Take the mortgages from the securitization trusts via eminent domain -- and pay fair value.

4. Permit modification of the mortgages in bankruptcy, or

5. Pass Gold Clause type legislation that changes MBS holders' rights in a way that will allow modification of the mortgages. There are several ways to do this. It might not ultimately be Constitutional, but I doubt any judge would issue an injunction, so by the time there was a final ruling, the matter would be over and done and the worst case is that the government would have to pay out some (maybe a lot) of money.

Because the McCain plan doesn't recognize the (admittedly complex) problems created by securitization it is simply unworkable. At best it will help a few homeowners, but Treasury is already authorized to do that.

Leonard adds:

But the easiest and quickest way to get real help to homeowners is point 4 -- permitting bankruptcy judges to make modifications of mortgages. But that proposal is being resisted so fiercely by the banking and securities industry that it was the first thing that Democrats dropped from their version of the bailout, in the face of strong Republican resistance.