Column by Brad Bowling

If you watched last week’s presidential debate, you no doubt heard Sen. John McCain unveil his mortgage bailout proposal.

It called for the government to spend an estimated $300 billion, which is almost half the $700 billion financial bailout money recently approved by Congress, to buy up home mortgages. The funds, according to McClatchy Washington, would come from a new Federal Housing Administration Fund.

The intent here is to restructure these mortgages so struggling homeowners can afford them and keep their homes. On the bank’s side, this would allow them to get rid of these so-called “toxic” assets on their balance sheets. On the surface, this may seem like a good concept, as many homeowners continue to be hit hard in this economic crisis.

But, as with most things related to our complex economy, this issue goes far beyond the surface.

For starters, this plan essentially lets banks off the hook. A mortgage loan is a two-way street. The lender must verify the creditworthiness of the borrower before making a loan. The borrower must make his or her monthly payments once the loan is signed and verified.

One of the underlying problems in this financial crisis has been banks’ extreme generosity in giving out loans. This proposed mortgage bailout almost completely alleviates banks from any risk or accountability.

Why would banks care about giving bad loans if the government will just step in and bail them out every time? Banks are just as much at fault (if not more so) for the mortgage problem as homeowners. And banks need to learn the hard way that loans are not to be given out on a whim.

Opposite the lenders, are the borrowers. There are certainly mortgage holders out there who have good credit but, simply due to worsening economic conditions, can no longer afford their payments. This plan would make sense if every borrower were like this.

But we know better. Every borrower is not like this. Many take out loans knowing well they cannot make the payments. Many took out loans back when the housing market was booming and interest rates were at an all-time low. Unless they took out a fixed-rate loan, these people are now facing a dose of reality, as interest rates have steadily increased in wake of the housing market’s decline.

These people took a gamble, and they lost. It may sound harsh, but that’s part of the process of taking on a non-fixed-rate mortgage. These people got in over their heads, and it sets a terrible example if the government just comes in and bails them out. What is to stop people from continuing to overstep their boundaries in the future?

Lou Barnes, principal of Boulder West Financial, makes another good point. According to the Rocky Mountain News, Barnes thinks that even with restructured mortgages and lower interest rates, it will still be more affordable for people to rent than own homes.

It’s hard to argue with this logic, given the range of most mortgage payments today. The Michigan Mortgage Guide reported that, as of Oct. 14, 2008, the average monthly mortgage payment in the U.S. was $1,295, while the average monthly rental payment was $388. That is a difference of $907 every month. And considering that most mortgages are around 30 years, we are talking about an exorbitant amount of money that a person must be willing to invest to own a home in today’s market. Many people just can’t afford payments this large, so renting is the only real option.

The most logical course of action would be to stay the course and allocate the $700 billion already approved to the areas in our economy that need it most. Investment banks need money to shore up their capital and avoid bankruptcy. Insurance companies need money to offset losses on bad investments and securities. But this proposed mortgage bailout just presents too many risks and not enough upside.

Commend McCain on trying to come up with a plan, but let’s go back to the drawing board on this one.