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Which candidate’s plan would best ease the mortgage crisis?

McCain and Obama differ on solutions, which could echo FDR’s during the Great Depression.

(Page 3 of 5)

“Getting this regulatory framework right to make this happen is absolutely the issue,” she says.

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Indeed, the latest loan modification effort, called Hope for Homeowners, has received only 79 applications since it started Oct. 1, according to the FHA. Under the plan, if lenders agree to take a big “haircut” and drop the principal down to 90 percent of the home’s current value, the FHA will back the loan.

“It’s still new, we are just starting the training,” says Bill Glavin, special assistant to the Federal Housing Commissioner. As such, he says, it’s too early to gauge industry interest – a sentiment echoed by the MBA, which says the industry likes the new plan and has already done 2.3 million mortgage workouts since mid-2007.

Yet Mr. Glavin agrees that complexity within the system isn’t helping. “There are situations where the servicers’ hands are tied because of the investors,” he says. “Obviously, the less people behind the loan the easier.”

One of the half-dozen options on the table for breaking the logjam, says Dr. Wachter, is McCain’s offer to buy mortgages at their full price. That would presumably please most investors and embolden servicers to sell.

McCain’s campaign puts the cost at $300 billion, some of which would come from the Wall Street bailout and Hope for Homeowners funds.

“Is it expensive? Yes,” McCain said during the final presidential debate Oct. 15. “But we all know, my friends, until we stabilize home values in America, we’re never going to start turning around and creating jobs and fixing our economy.”

Housing experts condemn paying full price, for reasons pointed out by Obama’s top economic adviser.

“John McCain wants to spend a big chunk of the rescue money, that ought to [go] to homeowners, paying off the most irresponsible lenders,” says Austan Goolsbee, a University of Chicago economist advising Obama. “That guarantees a loss to the US taxpayer.”

But how else to get servicers to agree to losses? Obama has embraced two alternatives: Show them the carrot of a “safe harbor” from investor lawsuits and the stick of bankruptcy judges who can write down loans.

Other ideas from experts (not the candidates) include using eminent domain to buy mortgages at a discount and removing tax preferences for mortgage trusts. On Friday, the director of the Federal Deposit Insurance Corp. suggested another option: a partial federal guarantee in case homeowners default again on a loan workout.

“No one of these [ideas] is getting traction, and we need traction soon,” says Wachter. “There are lawsuits going on, and [there is] a lack of understanding that if we don’t address this problem quickly, it will worsen by several degrees of magnitude.”

Not everyone agrees that more aggressive tactics are necessary.

“Every lender out there is already financially motivated to undertake such modification,” says Mr. Gabriel at UCLA. “My sense is the private sector is going to get better and better at this over the course of the next six months.”

During this learning curve, he says, a foreclosure moratorium might be sensible.