Texas Real Estate Daily

Only six months ago, John McCain advocated “temporary” help for homeowners facing foreclosure while preaching against a “bailout” of irresponsible parties – “whether they are big banks or small borrowers.”

On Wednesday, he pitched his new $300 billion plan for the government to buy distressed mortgages from banks without making them take a discount on the sale. The loans would be reduced, at taxpayer expense, so borrowers could afford to keep their homes.

The plan reverses Mr. McCain’s long-held aversion to bailouts, yet reflects a rising consensus that only the federal government’s deep pockets can save both banks and homeowners. Some critics conceded the plan might work even as they criticized it as welfare for banks that made bad loans.

“One of the pluses of Senator McCain’s plan is he’s saying we need to make this happen, the government needs to play a proactive role in buying these loans,” said John Taylor, president of the National Community Reinvestment Coalition.

Yet Mr. McCain would have banks selling the endangered mortgages at face value.

“It’s a total bailout,” Mr. Taylor said.

The proposal is likely to generate fans in some battleground states, such as Ohio, where foreclosure rates are among the nation’s highest. It may be viewed less favorably in states such as Texas, where the number of subprime-loan foreclosures is below the national average.

The plan may also be more difficult to implement than Mr. McCain suggests because individual loans are sliced and wind up as pieces of complex securities held by different investors, making it difficult to determine who owns a single loan.

Democrat Barack Obama criticized the plan Wednesday, saying it would “massively overpay for mortgages” and “guarantee” that taxpayers lose money.

“The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud,” his campaign said in a statement.

Critics said Mr. McCain’s idea isn’t new. Elements have appeared in proposals by Hillary Rodham Clinton in March, in the bailout engineered by Treasury Secretary Henry Paulson and by conservative academics in recent weeks.

Mr. McCain’s campaign conceded the plan echoes previous calls for the government to buy mortgages. But the proposal would work more quickly and could reach “millions of people,” said Douglas Holtz-Eakin, Mr. McCain’s senior policy adviser. The plan would use existing government programs to reduce foreclosures and stabilize housing prices.

Borrowers with subprime or adjustable-rate mortgages who can show creditworthiness would get federally insured fixed-rate mortgages. The interest rate would be around 5.25 percent, according to the McCain campaign.

The campaign says that if the program is successful, it could reduce the need to spend even more money to buy mortgage-related securities held by banks. Lawmakers authorized $700 billion for that effort, which can purchase whole mortgages.

Mr. Holtz-Eakin said more lenders would participate if they don’t have to take a loss on loans they sell. Lobbyists for financial-services companies agreed.

“Offering to purchase them at face value vs. a discount would make them more attractive,” said Scott Talbott, a lobbyist at the Financial Services Roundtable, which represents the country’s largest banks and insurance companies.

However, it’s not clear that the mortgages could quickly be sold to the government. The packaging of mortgages to investors creates “a layer of complexity” that may slow progress so much that the effort is “helpful, but too late,” Mr. Taylor said.

But James Gaines, research economist at Texas A&M University’s Real Estate Center, said the government could buy individual mortgages. The government has made some progress refinancing exotic mortgages through a voluntary program known as Hope Now, though its reach has been questioned by some critics.

“It does seem that a fundamental level buying the mortgage might have the most bang for the buck,” Dr. Gaines said. “You’ll be helping the borrower and keeping people in their houses, which also simultaneously might help stem the flow of the real problem, which is declining home prices.”

Yet analysts cautioned that Mr. McCain’s approach might not reach enough borrowers to make a difference.

Many loans were made to borrowers who didn’t provide a down payment or didn’t show proof of income – the latter known as Alt A loans.

In the first half of 2006, 16 percent of the value of all loans was in Alt A loans, according to the Mortgage Bankers Association. Even in the second half of 2007, after lenders began to pull back on such loans, the figure was 7.8 percent.

“In general, he has the right idea,” Dr. Gaines said. “What they are leaving out is there are other loans, beside subprime, that are also problematic.”

Credits: Dallas News

Coming just months after the latest round of tuition increases, the state of Texas is opening a new prepaid tuition plan.

The Texas Tuition Promise Fund opens today, offering families predictability and, hopefully, savings on college costs.

A previous prepaid tuition plan closed to new enrollments in 2003, after the Legislature allowed schools to set their own tuition, setting off five years of increasing costs.

Comptroller Susan Combs is expected to announce the details at a press conference in Austin today. A Web site, www.texastomorrowfunds.org, will have prices and other information, said R.J. DeSilva, a spokesman for the comptroller’s office.

DeSilva said the cost will be based on current rates, allowing families to lock in current prices. People may buy as little as 1 percent of a year’s tuition and fees, he said; prices will vary depending upon what type of institution participants expect a child to attend.

Tuition and fees at Houston Community College, for example, are about $1,300 a year. They are nearly $6,500 at the University of Houston, and more than $8,500 at the University of Texas at Austin.

More expensive later
Participating in the Texas Tuition Promise Fund will get more expensive as tuition increases, DeSilva said.

The fund is mainly intended for use at public colleges and universities in Texas, although DeSilva said it could be used at out-of-state and private schools, with some caveats.

Prepaid tuition plans may be an especially good option for families when a child is closer to starting college, said Keith Fenstad, a financial adviser at Tanglewood Wealth Management.

He also likes 529 education savings plans, operated by some educational institutions and a number of states — Texas has two 529 plans — and named after the section of the Internal Revenue Code that created them in 1998.

Prepaid plans cover only tuition and required fees, but money from a 529 plan also may be spent on room and board and related college expenses. You don’t have to send your child to a college in the state that administers the plan.

The most important thing, Fenstad said, is to be aware of the looming cost.

“I have a 4-year-old and a 2-year old, and this weekend I was talking to my wife about what it costs today to send kids to a (school like) Rice, and to Sam Houston State University, where we both graduated, and she was floored,” he said.

“It’s difficult to fathom what it will cost.”

Still, he recommends parents build short-term emergency savings before saving for college.

Saving for retirement is important, too. “You have multiple ways of funding college, but you don’t have a lot of ways of funding retirement,” he said.

Families should explore grants and scholarships, even if they don’t expect to qualify for need-based aid.

Preparation courses for the SAT can be a good investment if higher test scores help a student qualify for scholarships, he said.

Living at home while attending a local university is another option.

“I would rather see the student live at home and go to the local university than see the parents raid their 401(k),” he said. “When you strictly look at tuition and fees, it becomes a lot more palatable.”

Credits: Chron