Most striking is that Hope for Homeowners has attracted unexpected backers: Investors who had refused to consider the program’s requirement that they forgive some of a borrower’s mortgage balance if the home is worth less than is owed, known as being underwater, are now trumpeting that provision.

“Institutional investors that own securities backed by mortgages are extremely keen to write down principal in exchange for the borrower refinancing into a Hope for Homeowners loan,” said Tom Deutsch, deputy executive director of the industry group American Securitization Forum.

Investors that were previously unwilling to write down the value of their loans are increasingly on board with the practice — anything to get those loans off the books. A bird in the hand is worth two with a high probability of default, as they say. But there’s something amiss here. If investors believed that they would maximize their return on troubled loans by reducing principle, they would. That is, if they thought that by writing down the principle on a loan they would increase the odds of payment by enough to make the haircut worthwhile, then it would make sense for them to go ahead and do so. And if they were already doing so, then there would be no need for this program.

But clearly there is a need. Investors are only ready to write down principle if that allows them to shed default risk — which means they don’t think that writedowns lead to large reductions in default risk. And they’re probably right. Under this program, there are new borrowers waiting to pick up the loans because Federal Housing Administration is authorized to insure them — up to $300 billion. It kind of looks as though the government is working hard to absorb up to $300 billion in mortgage loan losses from various investors.

Hope for Homeowners seems primarily geared toward providing hope to investors, rather than homeowners. Given the extent to which unemployment is driving defaults in the current climate, a serious effort to stem foreclosures would focus on generous extensions of unemployment benefits, to the exclusion of most everything else.

New money, as in, additional to the $700 billion already appropriated by Congress to bailout failing Wall Street firms.

From ABC:

Asked if his mortgage plan would be “new money or part of the $700 billion” already appropriated by Congress for the Wall Street bailout, McCain said, “part of the $700 billion, new money, if necessary.”

“Look,” he continued, “in one day they wiped out $1.2 trillion when it dropped 700 points. And I’m not throwing this money around lightly. But if the housing values continue to go down, there’s no floor. There’s no turnaround here. We all know what was the catalyst for this catastrophe. And that was Fannie and Freddie.”

McCain’s plan, announced Tuesday at the presidential debate in Nashville, has come under criticism for putting taxpayers on the hook for bad loans made by banks.

However, The Atlantic’s Marc Ambinder raises the possibility that the plan may already be illegal:

Folks who are much more savvy on the specifics of the Troubled Asset Relief Program (TARP) wonder whether the government’s $700 billion bailout/rescue program expressly prohibits what John McCain now says he wants to do — and that is to have the government buy distressed mortgages at face value from banks and renegotiate their terms with homeowners.

They point me to Section 101e of the law, which requires the Secretary of the Treasury to “take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section”

Here’s the key part…

… “including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset.” Any loan that is not held by the originator, and the vast majority loans are not, would fall under this provision.”

So — if the bank gave you a 100 dollar loan…. and sold it for 80 bucks last year, and it’s trading at 50 dollars now, the law prohibits the government from buying it at $100 — face value — because that would “unjustly enrich” the entity which purchased the mortgage from the bank.

Under TARP, the government wouldn’t be able to buy it for more than $80… which isn’t face value.

So if they buy it at face value, wouldn’t they violate the law?

If this is the case, it could be back to the economic drawing board for McCain. It’s no secret the financial crisis is killing him in the polls.

If the “William Ayers”-strategy of diverting attention from the nation’s economic woes turns out to be the non-starter that it appears to be, McCain has 25 days and counting to start connecting with voters on the issues that really matter to them — like remaining their homes and being able to retire.

If he can’t do that, he can probably kiss the presidency good-bye.