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Tuesday, November 29, 2022

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How to Solve the Housing Crisis Tomorrow

200 years ago, Thomas Jefferson warned us: "If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children will wake up homeless."

Well, 7,000 families a day are now losing their homes to foreclosures, that's roughly 21,000 men, women and children each day being forced out of their homes, being stripped of their assets and often their life savings.  This isn't a one-day problem for these people, it can take many years to recover from losing a home, if ever!

Back on January 21st, when the market was crashing, I rolled out my emergency econonic measures to fix this country and our readers put it into the hands of various people and some of my points have even found their way into policy (or at least rhetoric) but not enough is being done NOW, when we need it.

You can reread my original article, which includes a way to drop oil back to $60, that was written when oil was "only" $85, way back in January, but I don't want to get sidetracked because we can solve the mortgage crisis tomorrow and right the global economy, curb inflation and put people back in their homes tomorrow by doing one simple thing:

We're going to give every homeowner $100,000!

Not in the George Bush crazy "let's borrow more money and create more inflation" sort of way.  My plan is simple and effective:  The US Government issues a simple one-page form to every US homeowner that allows them to transfer $100,000 of their home loan to the United States in exchange for $125,000 of the home's equity (up to 50%).

  • This would effectively halve the average person's mortgage, putting roughly $600 PER MONTH back into the hands of homeowners.
  • This would halve the risk taken by the banks and release as much as $1Tn in liquidity for other types of loans.
  • This would stabilize housing prices (people are not forced to sell).
  • This would stop the banks from having to "write down" an estimated $450Bn in assets (meaning they can now pay taxes like they are supposed to).
  • This would keep families in their homes and in their communities as productive taxpayers.

How much would this cost us?  Well, there are 100M homes in this country and if every single one of them took us up on the offer (and remember you are giving the government a 25% bonus) then it would cost the US government $10Tn, a pretty hefty sum!  The reality is that only 10% of the homes in the US have mortgages in excess of $250,000 (it only seems like everyone in your neighborhood) and 30% of the homes in this country have no mortgage at all.

So, of a population of 70M homes with mortgages, let's assume 1/2 take us up on the offer to go partners on their home, that's 35M families who feel they need relief badly enough to give up half of their home's value.  Since 90% of the homes have mortgages of less than $250,000, with a median debt of $150,000, that's $100,000 times the first 3.5M homes ($350Bn) and $75,000 times 31.5M homes ($2.362Tn) giving us a conservative need for $2.7Tn in relief.

Sounds like a very big number doesn't it?  Don't forget though, this is not a giveaway, this is the United States government investing in United States real estate, putting the money back to work in the economy.  As these homes do get sold (average housing turnover is 6 years) we get 15% of that money back each year, even assuming it did all get used in year one.

Since the the government borrows money at 4.4% for 30 years (the price of the 30-year treasury bond), our "mortgage payment" on $2.7Tn is $13.5Bn a month.  That's right, just $13.5Bn a month to IMMEDIATELY reverse the housing crisis, IMMEDIATELY stop 7,000 families a day from losing their homes, IMMEDIATELY stabilize the financial community (we just gave JPM $30Bn last month to bail out BSC), IMMEDIATELY stabilize the $26Tn housing market, IMMEDIATELY revalue the dollar and IMMEDIATELY inject $17.5Bn PER MONTH back into the economy.

How can we inject more money into the economy than we spend?  Because the average homeowner pays more than 6% on their mortgage and the government can borrow money at 4.4%, very simple!

Mr. Potter - Winner of the Hank Paulson look-alike conterstNot only that but by rescuing the value of the sub-prime home loans and CDOs, we allow our lending institutions to "write-back" the $450Bn they are taking off the books and pay the proper taxes on them.  At 35% that's $157Bn right there – enough to fund our first year of payments!

As the homes get sold, the government gets back 125% of what they invested (plus the interest of course) but even keeping the simple 125% return and stretching the turnover to 10 years that's still a return of $330Bn a year on our $2.7Tn investment that would, of course, lower our "mortgage payment" by 10% a year, even if we don't reinvest the profits.

So improved tax collection funds this plan in year one and by year two we're running at a profit and we save 4M homes from foreclosure, save the economy from disaster and even bail out the evil bankers.  Sounds like a win-win solution doesn't it?

If you like this idea, please send this to your Congresspeople.  They can debate me or they can steal this idea and pretend it’s their own – I don’t care as long as something gets done in this country.  Send it to action committees and people who vote and tell them it’s possible to have real dialog and perhaps SOLVE some of our nation’s problems, rather than blame the other guy or brush it under the table. 

You can find your Congresspeople’s EMail HERE!

 

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Brilliant!

Phil – In presenting this solution you have started my day, with a thoughtful smile!  
 
How refreshing!
 
 

u the man phil

EDU –  Out with a strong earnings surprise of .35 vs .23 expected. 

Yes!
very impressive.
 
what’s the correct link we need to pass this on to non-subscribers?  want to send it to hill and chuck.

I think this would crush the dollar. Foreigners would flee from Treasurys at the thought of another 2.7T in debt. Treasury yeilds would blow higher, forcing the cost of credit to skyrocket. Sorry, but I think this would be a disaster.

Phil for President?   🙂

Testing.

Phil, where’s the $2.7Tn going to come from? I take it transferring part of all those home loans means the U.S. Govt. is assuming the debt. It’s taking that loan onto its books. And the Treasury Dept. has to maintain its balance sheets, even if it’s deficit spending.
Are you going to raise taxes? Print money? Or are you assuming that we finance this debt purchase by issuing treasuries? If the latter the market for treasuries would collapse — it’s not that far from doing so NOW. If we forged ahead anyway, the rate we’d have to pay to get people to take Ts wouldn’t be 4.4% but something vastly higher. And this in turn would absolutely destroy the availability of cheap credit. Heaven help the people with variable-rate mortgages under such a plan. If they had a significant balance remaining, they’d likely be paying far more in interest on the remainder of their mortgage than the amount they had offloaded onto the Govt.
 

I’m having some problems understanding your proposal. From what I read most folks facing foreclosure  have little if any equity.   If the US government picks up $100,000 of their mortgage, where is the equity to transfer to the government?

The mortgages involved are relatively recent which means very little equity will be picked up in the six years average period of home ownership. It’s mostly interest paid in the early years.

I don’t see where the government will get its $125,000 in equity.

Another possible problem is future home prices. Your assumption is that home prices are falling because of homeowners inability to pay their mortgages and that the implementation of your proposal would stabilize prices. Certainly failing mortgages are  a factor in abetting lower home prices but many if not most of the mortgage problems started after home prices began to fall. The false assumption by mortgagors, mortgagees, banks, etc. was that home prices would continue to rise over the life of the mortgages. When that stopped, the problems began. Unstable mortgages did not cause the drop in home prices and stabilizing mortgages, while helpful, is unlikely to stem the ongoing downward progression in home prices.

Housing is cyclical and IMO will do what it pretty much always has done; i.e. revert to norm which is prices that are affordable at 3 times family income after a sizeable down payment. We’re a long way off from that and likely have considerable price reductions ahead.

If your proposal applied the $100,000 to the principal as opposed to paying interest, then the government would at least have $100,000 in equity at the start. Continued falling home prices and a falling dollar could place even that equity at risk.

Banks could be required to provide fixed term low mortgage rates in return for the government stabilizing their mortgages and to accept the government payment to be for principal. If your proposal applied the $100,000 to the principal as opposed to payments that are primarily interest, then the government would at least have $100,000 in equity at the start. Continued falling home prices and a falling dollar could place even that equity at risk.

I don’t see the great harm to families from forecloses . Right now families facing foreclosure are spending more than half of their income on mortgages for overpriced homes. They are struggling to make ends meet. Many are upside down in mortgages. As a result of the failing housing market, there are far cheaper rentals available as an alternative to home ownership. From what I’ve read in some of the most overheated markets, people are paying mortgages at 8 times comparable rentals. The homeowners facing foreclosure or at least having  great difficulty paying their mortgages have an opportunity to walk away from their mortgages, rent comparable housing and stabilize their finances. They do not appear to be facing homelessness but rather an opportunity to get out of an impossible situation. After housing prices have fallen to an affordable level, then they can buy again with a reasonable mortgage.

The losers under this scenario are the banks who bought the mortgages without concern for their soundness. Why not make them take the responsibility for their irresponsible behavior?
 
 
 
 
 

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