John McCain Addresses the Orange County Hispanic Small Business Roundtable, March 25, 2008

A sustained period of rising home prices made many home lenders complacent, giving them a false sense of security and causing them to lower their lending standards. They stopped asking basic questions of their borrowers like "can you afford this home? Can you put a reasonable amount of money down?" Lenders ended up violating the basic rule of banking: don't lend people money who can't pay it back. Some Americans bought homes they couldn't afford, betting that rising prices would make it easier to refinance later at more affordable rates. There are 80 million family homes in America and those homeowners are now facing the reality that the bubble has burst and prices go down as well as up.

Of those 80 million homeowners, only 55 million have a mortgage at all, and 51 million are doing what is necessary -- working a second job, skipping a vacation, and managing their budgets -- to make their payments on time. That leaves us with a puzzling situation: how could 4 million mortgages cause this much trouble for us all?

The other part of what happened was an explosion of complex financial instruments that weren't particularly well understood by even the most sophisticated banks, lenders and hedge funds. To make matters worse, these instruments -- which basically bundled together mortgages and sold them to others to spread risk throughout our capital markets -- were mostly off balance sheets, and hidden from scrutiny. In other words, the housing bubble was made worse by a series of complex, inter-connected financial bets that were not transparent or fully understood. That means they weren't always managed wisely because people couldn't properly quantify the risk or the value of these bets. And because these instruments were bundled and sold and resold, it became harder and harder to find and connect up a real lender with a real borrower. Capital markets work best when there is both accountability and transparency. In the case of our current crisis, both were lacking.

The net result is the crisis we face. What started as a problem in subprime loans has now convulsed the entire financial system.

Let's start with some straight talk:

I will not play election year politics with the housing crisis. I will evaluate everything in terms of whether it might be harmful or helpful to our effort to deal with the crisis we face now.

I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers. Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy.

In our effort to help deserving homeowners, no assistance should be given to speculators. Any assistance for borrowers should be focused solely on homeowners, not people who bought houses for speculative purposes, to rent or as second homes. Any assistance must be temporary and must not reward people who were irresponsible at the expense of those who weren't. I will consider any and all proposals based on their cost and benefits. In this crisis, as in all I may face in the future, I will not allow dogma to override common sense.

When we commit taxpayer dollars as assistance, it should be accompanied by reforms that ensure that we never face this problem again. Central to those reforms should be transparency and accountability.

Homeowners should be able to understand easily the terms and obligations of a mortgage. In return, they have an obligation to provide truthful financial information and should be subject to penalty if they do not. Lenders who initiate loans should be held accountable for the quality and performance of those loans and strict standards should be required in the lending process. We must have greater transparency in the lending process so that every borrower knows exactly what he is agreeing to and where every lender is required to meet the highest standards of ethical behavior.

Policies should move toward ensuring that homeowners provide a responsible down payment of equity at the initial purchase of a home. I therefore oppose reducing the down payment requirement for FHA mortgages and believe that, as conditions allow, the down payment requirement should be raised. So many homeowners have found themselves owing more than their home is worth, because many never had much equity in the house to begin with. When conditions return to normal, GSEs (Government Sponsored Enterprises) should never insure loans when the homeowner clearly does not have skin in the game.