Housing crisis is a test for McCain

Times Staff Writers

John McCain has been winning over skeptical conservatives by embracing tax cuts while promising a new era of fiscal discipline if he wins the White House. But his fragile relationship with the Republican base will be tested again as he decides whether to support controversial plans for addressing the mortgage crisis.

At issue is a proposal to shore up beleaguered mortgage giants Fannie Mae and Freddie Mac, one piece of a broader housing aid plan that could come to a vote in Congress as early as next week.

Leading conservatives acknowledge that relief may be necessary for the government-sponsored companies to prevent more damage to the mortgage industry and real estate market. But they are urging McCain to demand major changes, beyond what the Bush administration has proposed, in the way the lenders do business -- either to sever the government’s support for them or dramatically shrink their mandate.


Pat Toomey, head of the conservative Club for Growth, called Friday for McCain to “stand up and say what’s right here . . . and it’s not right to just put a lot of taxpayer money into these companies and just go back to business as usual.”

Another influential conservative, Rep. Paul D. Ryan of Wisconsin, the top Republican on the House Budget Committee, said he “would like to see the nominee of our party be in favor of containing these entities, so they don’t put the taxpayers at risk ever again.”

Those comments underscore the balance McCain, the presumed GOP presidential nominee, must strike as he attempts to satisfy his party base while showing the broader electorate that he can handle a real-world crisis that demands bipartisan problem-solving, a skill he has claimed as one of his strengths.

Fannie Mae and Freddie Mac hold or guarantee about half of the nation’s home mortgage debt. Shares in both companies, which are government chartered but publicly traded, have sunk recently amid doubts that they have enough money to cover recent mortgage losses. If they worsen, problems at the two companies could further damage the housing market and the broader economy.

In response, Treasury Secretary Henry M. Paulson this week asked Congress for temporary authority to provide capital to the two companies. Under an unusual arrangement, the government would make direct loans of an unspecified size or buy company stock.

The challenge on the economy is greater for McCain than for the presumed Democratic nominee, Barack Obama, whose party base generally favors government intervention in tough times. Surveys show Obama leading when voters are asked who is best able to handle the economy, whereas McCain’s strengths are seen as dealing with foreign policy and terrorism.


Obama’s economic policy advisor, Jason Furman, said Friday that the senator is “encouraged” by the progress of the housing and Fannie Mae legislation, suggesting that the Democrat was likely to support Paulson’s plan.

So far, McCain has been cautious. Asked last week by a CNBC interviewer about the fate of the two companies, McCain said: “We will not allow them to fail.”

But the Arizona senator has yet to say whether he would support the Paulson plan in the Senate or to specify what he would demand in return for the federal assistance.

In a statement to The Times, McCain’s campaign said the Paulson plan was “consistent with the goal of providing support for a path through the current duress,” but that an “essential” element would be “regulatory reforms that impose market discipline and mission focus.”

Comments from the campaign seem designed in part to make a case to conservatives that McCain hears their concerns. “It’s not appropriate for these institutions to be making money with taxpayer backing, and reforms have been needed for a long time,” said McCain’s economic advisor, Douglas Holtz-Eakin.

Still, fiscal conservatives said they want to hear more. They also said that McCain could use the debate to burnish his credentials as an enemy of special interests, because Fannie Mae and Freddie Mac are among the biggest spenders on lobbying and political donations.


“This is an opportunity for Sen. McCain to talk about reform, and that’s his forte,” Rep. Tom Feeney (R-Fla.) said.

But some McCain supporters believe he cannot afford to oppose measures designed to help homeowners and to stave off a market collapse. They think he should support a rescue plan, though one with safeguards to limit executive pay raises and shareholder enrichment on the taxpayer’s dime.

“You can talk about smaller government and so forth, but if you find someone lying in a ditch with arterial bleeding, you have to call an ambulance,” said former Sen. Warren B. Rudman (R-N.H.), who is advising McCain on economic policy. “If the government doesn’t send it, then nobody will.”

In addition to fears that he may anger fiscal conservatives, McCain must be wary of attacks from Democrats, who have already signaled an intention to paint him as unsympathetic to homeowners in need.

In March, both Obama and then-candidate Hillary Rodham Clinton attacked McCain when he said in a speech, “It is not the duty of government to bail out and reward those who act irresponsibly.” McCain later issued a statement saying that government did, in fact, have a responsibility to help deserving homeowners at risk of foreclosure.

Now, Democrats would welcome an opportunity to accuse McCain of leaping to ensure safety for two big companies while agreeing only reluctantly that homeowners need relief.


Part of McCain’s problem in navigating the politics of a rescue plan is that he has criticized government-backed companies in the past.

“It’s an issue that would have been a no-brainer for McCain back when he was the maverick fiscal conservative from Arizona,” said Steve Ellis, vice president of Taxpayers for Common Sense, a nonpartisan budget watchdog group. He said McCain had generally espoused a “no bailout, tough-love philosophy” when it came to government intervention.

Complicating matters for both McCain and Obama is the continuing political might of Fannie Mae and Freddie Mac.

Though the lobbying power of the firms has declined amid the housing market downturn -- Fannie Mae spent $5.6 million on lobbying in the Capitol in 2007, down from $10.1 million the year before, according to the Center for Responsive Politics -- it still wields considerable clout.

Such sums have given the company bipartisan influence, with lobbying and consulting contracts spread among Democrats and Republicans.

McCain’s campaign manager, Rick Davis, was president of an organization, the Homeownership Alliance, that advocates for expansion of low-interest loans funded by the two mortgage giants. Federal records show that Arthur Culvahouse Jr., who is heading McCain’s vice presidential search effort, was a lobbyist for Fannie Mae. Rudman was hired by Fannie Mae to lead an internal review of the company’s accounting policies that concluded in 2006.


Until recently, one of Obama’s advisors on vice presidential selection was James A. Johnson, who once led Fannie Mae.

Obama has been one of the largest recipients of campaign contributions from donors associated with Fannie Mae and Freddie Mac, receiving $105,849 since he first ran for national office four years ago. That made him the third-largest recipient among the top 25 listed in a recent report by the Center for Responsive Politics, which looked at contributions dating to 1989.

McCain did not make the group’s top 25 list.