Bailing out Homeowners

| Wed Oct. 8, 2008 12:50 PM EDT

BAILING OUT HOMEOWNERS....Last night, when John McCain mentioned his plan to directly rescue homeowners facing foreclosure, I wasn't paying attention. To be honest, I'm so hardwired to assume that presidential debates are just rehashes of old talking points that I thought McCain was merely tossing off another platitude — we need to protect the taxpayer, we must help distressed homeowners, we will focus on job creation, blah blah blah. I didn't realize he was serious about the homeowner part, complete with an actual new policy proposal and everything.

And apparently I wasn't the only one. Marc Ambinder reports that "The proposal certainly seemed to have caught even McCain's surrogates off guard; they had not been prepped to answer questions about it. The media didn't quite know what to think, and there hasn't been too much attention paid to this yet, even though it's a bold and expensive idea." So I don't feel quite so bad about missing this.

Of course, the devil is in the details in a plan like this. Who do you rescue? Everyone who's underwater? Everyone with a subprime loan? Everyone in foreclosure? Only people who are victims of fraud? How do you figure out who that is? And what does "rescue" mean? Restructuring their loan? Putting a halt to all repos? How do you prevent people from gaming the system? Will it prevent house prices from settling back to their natural level? Etc. etc.

Technically, most of those details can probably be worked out. But what interests me is that there's another potential hurdle: the public might not actually buy it. The only comment I did make in real time about McCain's proposal was an observation that CNN's focus group "against expectations, really didn't like McCain's idea of bailing out homeowners directly." And the reason for that appears to be straightforward: cautious, responsible homeowners who took out cautious, responsible loans and bought cautious, responsible houses, are not necessarily thrilled at the idea of their idiot profligate neighbors getting a federal bailout for the idiot profligate loans they took out on their idiot profligate house/remodel/HELOCs. After all, the bulk of the people who need help are not old friends who bought their houses 20 years ago, it's brand new neighbors who swept into the neighborhood in 2006 on a rising tide of debt and shiny new cars. Sympathy for these folks may not be nearly as high as many of us suppose.

Now, this may seem perverse in some ways. Obviously not everyone in foreclosure acted recklessly. And in any case, is bailing out a neighbor who acted recklessly really any worse than bailing out a bunch of Wall Street fat cats who acted recklessly? Maybe not, but the public is none too thrilled about bailing out the fat cats either. And let's face it: your next door neighbor is.....next door. If he seems like an undeserving sort, bailing him out might cause your blood pressure to go up way more than bailing out a bunch of distant banks. For better or worse, that's just human nature. Especially if your next door neighbor has a dog that drives you nuts by barking all night. Just take a look at the now-famous Irvine Housing Blog for a daily helping of exactly this schadenfreude-filled attitude.

So, technical issues aside, it's quite possible that this is not the political winner McCain thinks it is. I note that Obama hasn't really picked up on it, even though his speech today in Indianapolis was a perfect opportunity to do so. I wonder if he understands something the rest of us don't?

UPDATE: Brad DeLong points out that on a technical basis, the McCain plan sucks very, very badly because it directly bails out the banks that made all the bad loans. Details here.