Republican presidential candidate Sen. John McCain weighed in with his long-awaited housing and mortgage policies last week -- and perhaps not surprisingly, they don't look like anybody else's -- including those of the Bush Administration.

High on McCain's to-do list is something almost no Democrat or Republican leader has advocated: Raising, not lowering, minimum mortgage downpayments for the rapidly-growing FHA program.

Pending bipartisan legislation on Capitol Hill would CUT FHA's downpayments from the current three percent minimum to as low as zero -- favored by the House -- or to 1.5 percent -- favored by the Senate.

But McCain, who's built his career going against the grain, said last week even three percent may be too low.

"So many homeowners," he told a California audience, "have found themselves owing more than their home is worth because they never had much equity in the house to begin with."

McCain also rejected foreclosure-prevention plans favored on both sides of the political aisle that would use the FHA -- or some new, temporary government agency -- to buy up defaulting mortgages at discounts, then refinance borrowers into more affordable replacement loans.

He said he opposes bailouts of lenders who made bad loans, which would in effect be rewarding them for their own poor underwriting decisions.

"Government assistance (to lenders)," according to McCain, "should be based solely on preventing systemic risk that would endanger the entire financial system and the economy." In other words, if Fannie Mae or Freddie Mac were on the brink of going down the drain, thereby imperiling the entire U.S. mortgage system, McCain might favor intervention.

But short of that sort of collapse, he thinks lenders today ought to modify borrowers' loans, reduce principal debt and interest rates -- taking the hits to the bottom line themselves -- rather than looking to the federal government.

McCain also proposed something that no candidate -- and virtually no one on Capitol Hill -- has mentioned so far: He favors taking a hard look at, and maybe changing, the controversial accounting rules that force big banks and others to "mark to market" their mortgage holdings -- that is, attempt to estimate the current value of loans and mortgage securities on their books -- in their public reports.

He said when there are no good measures of the true value of mortgage bonds -- when no investors want to buy them and no index tracks them -- current accounting rules may make lenders' balance sheets look far worse than they really are.

That, in turn, in McCain's view, is "exacerbating the credit crunch" -- and ultimately hurting home buyers and borrowers.

Published: March 31, 2008

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.