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. 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. 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 70 million homes with mortgages, let’s assume 1/2 take us up on the offer to go partners on their home, that’s 35 million 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 3.5 million homes ($350Bn) and $75,000 times 31.5 million 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!

Not 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 4 million 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!

Comments

[John Walter]

Maybe I just don't understand, but these ideas are less than half-baked, they're completely uncooked.

* where does the government get the several trillion bucks to give homeowners in exchange for half their homes? (Ans: it prints the money. Hello, big-time inflation.)

* what does the government do when mortgages are unpaid (Ans: it kicks out homeowners and forecloses, just like banks. This is improvement?)

* what kind of country is it, where the govt owns a significant share of all private property? (Ans: starts with 'C')

The list goes on and on; I fail to see how this plan solves ANYTHING. Someone correct me so I don't have to question the judgement of Seeking Alpha's editors in allowing such idiocy on these pages...

[jsizzle]

I love how he quotes Jefferson in the same article that is proposing a massive increase in Federal government power via the assumption of private property.

This idea is ridiculous. As previous poster noted, the money doesn't exist for them to do it and it simply replaces private banks with Federal government. Seeing how the Federal government has been unable to run any program effectively (social security, medicare, etc.), I'll take my chances with the private banks.

[bearfund]

Who will buy the $2.7T in Treasuries? My understanding is that's about 30% of all outstanding Treasury securities of all maturities. Even sold over a year or two, that's an enormous amount for the market to absorb. Yields would soar, negating most of the advantages.

And, where does the 25% bonus come from? Most of the people in question have neither $25,000 in equity nor 25% of half their home's value. Is the government going to steal it from the lender, steal it from a future buyer, require that it be repaid by the current owner at next sale, or create it out of thin air? The first two are illegal and confidence-destroying, the third is highly risky, and the fourth is hyperinflationary.

[drmalaka]

Just to add a little more reality to the comments. Who exactly is going to be buying these houses in the next several years?

So you want the government to help artificially inflate prices? Do you not realize that part of the problem with our housing is that it is not affordable. Most of the homes sold in 05-07 were to deadbeats with no money. Who is going to buy the homes now? Deadbeats can't get loans. Responsible people will not spend $400k on a $250k house.

Economics is based on this really, really complicated concept known as supply and demand. Considering supply is well above any normal demand levels already and now your solution is to keep the prices up at a level where demand is even lower.

Plus to boot you ask me to pay for these deadbeats who bought homes they could not afford. Great idea.

[john1940]

I'm glad the prior posts took care of this idea. I had to read the plan three times to see if I was reading it correctly. I was. It's ridiculous and won't even get to first base. Do not send this to Washington. They may turn it into law immediately.

["Magazine-Cover-Indicator"Indicator....]

"moderation in all things" is wiser than many people realize.

When we go to rescue families that speculated on rising house prices with their own home, we need to rescue some and not all.

Because....home *owners* are not *all* Americans.

There are Americans, families with kids included, that are working to be able to buy their first home.

They will rely on house prices normalizing back to typical levels vs incomes.

[tradeking13]

You forgot one thing -- changing the name of our country to the United Soviet States of America.

[fxtrader07]

adding to the critical comments that I fully share I might point out that the U.S. govt. effectiveky already supports and "owns" a lot of private real estate via the GSEs Fannie and Freddie. Yes they had higher quality standards so their default rate will be lower but still you will be astonished in how much trouble the GSEs will come with their 30x leverage. The govt will find itself soon saddled with lots of real estate collateral even without implementing the plan of the author! And, as usual this plan will actually not so much bail out amrican families as it is set to bail out irresponsible lenders and investment banks.

[mbyington]

The way to fix the foreclosure "problem" is to let the free market work unhindered by politicians and big government. I'm in the process of buying a pre-foreclosure house right now, in fact, for a more reasonable 250k and my family's annual income is around 160k. We rented for three years and actually SAVED for a down payment while living below our means. The family that was foreclosed on has an annual income of around 50k and they bought the house 2 years ago for 450k. They drive nice, late-model cars and have a big-screen TV. My family has neither.

So I ask... who should REALLY be living in this house? A family that borrowed 9 times their annual income with no down payment and used cash-out options to buy nice cars and gadgets?

No? How about a family that rented, saved, and lives below its means?

Let the free market work, my friend, and let the government govern instead of gamble.

[billb]

I couldn't even finish this article, this idea is so ridiculous. Sorry.

[Wez]

mbyington - Bravo!

Same situation here, frankly I'm hoping there is way more carnage in the residential markets. Saving 20% for a home in a nice SoCal neighborhood near the beach, even with 200k+ joint income is almost impossible with 2 kids.

[rufusmcbufus]

Is this an entire month of April fools?

[The Jackal]

What the Hell is the authors problem???? Government intervention is not a good idea and it will not solve the housing crisis. Any intervention will only prolong the problem.....the sooner we reach the bottom and wash-out all the excess the better. The lenders and borrowers should be responsible for their actions, if they made a bad decision they should take responsibility. When we buy a stock at $50 then goes down to $25 does the gov't bail us out? NO !!! The author is a clown. Stop posting his crap.

[Philip Davis]

$6Tn worth of loans were written to the "deadbeats" you want to evict last year so the government doesn't have to print money, they simply use their good credit to purchase assets, the only difference is that they are not jacking up the homeowners with fees and interest rates.

Unpaid mortgages will be treated normally, the idea is that most people CAN afford to pay a 50% reduced mortgage.

If you have to resort to red baiting by your third question then you are already deep in a hole aren't you?

25% bonus. Well you must have $25K (or 25% over the loan amount) in value in the home to give. This automatically weeds out people who made no deposits, overpaide etc as we are not looking to bail out bad lenders or bad buyers.

We could work with the lender to improve the equity in a number of ways (yes, they could take a haircut rather than foreclose).

We are not inflating prices, we are maintaining prices at this level which I would grant may be inflated but that damage is done. Allowing the free market to take its course and wipe out another $5Tn in home values may sound fun for the vultures but it will certainly wreck the economy for many, many years.

Yes the government is in up to its eyeballs with Fannie and Freddie anyway so it is very much in their interest to soft-land the housing market any way they can.

[ViktorAugust]

This article is preposterous! We should be pushing for less government involvement in the market, not more! We wouldn't be in this mess were it not for the Federal Reserve (a quasi governmental agency). The US government should get out of the business of housing (via tax breaks, mortgage industry involvement, and host of other subsidies), setting interest rates, and the financial industry as a whole.

Banks who lend idiotically and people who borrow stupidly should be punished by the market, not propped up with taxpayers money via the government. Let the market do its job by liquidating these fools.

[1option]

LOL You just made my day! This must be a joke right?!

[FreeMkgGuy]

The government has to get out of the way. Nothing needs to be done. What happened to free market???
Reckless lending, greed and fraud got us here. Let it play out. The housing values so out of touch with incomes and reality. It will just get back to normal. All this government meddling just prolongs the pain.

All this 7000 people you are talking about had no business being in the house in the first place if they could not afford it.

If you still want government intervention, just make it mandatory to have 20% downpayment! That will solve all the problems :-)

[Ryan Freund]

In my opinion, we should let the banks who made bad bets fail, as well as real estate speculators. Those who received deceitful loans should get a reprieve, such as locking in interest rates at 1% above standard fixed rates. This means those who locked in with prudent mortgages are still coming out on top, but the rest aren't losing their homes.

Allow Bear Stearns to fail, allow the derivatives market to die, and pick up the pieces when all is said and done.

I would rather have a few years of absolute hell than 20 years of protracted crap, while the CEO's of these major banks set up their golden parachutes.

I wrote about this earlier, about who's to blame, here:

freundinvesting.com/20.../

[Ryan Freund]

Oh and to clarify, don't help those who have multiple properties, only those with one - their primary residence.

[CarlosSlim]

The Free Market!!!

The Free Market!!!

The Free...what?

Nevermind.

[James Cullen]

How the heck did this get the top headline on Seeking Alpha?

[monday1929]

Like those who claimed the Katrina re-building would be a boost to the economy (broken windows fallacy), this idea sounds so good that we should arrange to have a massive credit bubble burst every ten years or so, just so we can utilize this great solution. Step right up everbody's a winner, step right up here!

[Nemesis]

This is a TOTALLY lame brain idea centered around the idea that government is the solution versus the problem.
1. This gives the government yet more incentive to inflate (debase the currency) as it will share in the nominal appreciation profits. If a home s worth x dollars, by debasing the currency by 50%, the home is now worth 2x nominal dollars. The government shares the "gain".
2. There is no horizontal equity. Those who responsibly postponed, or forwent, consumption in order to pay their debts get to subsidize those who over consumed. Those who have no mortgage - yes, dear reader actually paid it off, imagine that - will get no benefit at all. "No good deed goes unpunished". It would behoove them to remortgage their property to the $250K level (above the national average) whether their house is worth it or not. No trouble with financing such a scheme given that half of the debt could immediately be offloaded to taxpayers, oops I mean the guvmint.

I could go on - but why bother. My guess is that Davis is from New Yark - a veritable Wayne's World of government centered "solutions" that always seem to enrich the beloved New Yarkers.

[Wez]

Philip Davis - Obviously not everyone here agrees with the notion that wiping out another $5Trillion in home values will wreck the economy for years to come. It would hurt speculators and people who used their home as ATMs, home builders and plenty of other companies that contributed to the mess in the first place.

You could also argue that without wiping out another $5Trillion in home values would help as many people as it would hurt. I know I'm sitting on a pile of cash that is earmarked for a 20% down on a highly inflated house in the neighborhood I live in. If prices home values dropped another 20%, that may unlock a flood of savings money into the housing market and into the rest of the economy.

[theoakman]

You could fix the market by letting the prices fall to their true value. Oh what a crime that would be. Newflash. The government has no money. It only has a printing press. You can either let the prices fall, or debase your currency enough to erase the debt. Unfortunately, they are opting for the latter. Hopefully this stops after the election.

[Malkiel]

Davis says that only 10% of American mortgages are over $250k, but what if 60 or 70% or more of mortgages in LA or LV or FL or NYC are over $250k? Then it becomes a subsidy of some of the country's already wealthiest regions--how do we feel about that?

[cowboyinvestor]

Phil: Congratulations on stirring up the hornets nest. I applaud you for some original thought. We need to start somewhere with this dialogue instead of the same old stale ideas. Your brain is obviously churning I hope it continues.

["Magazine-Cover-Indicator"Indicator....]

User 179274: Yes, he only needs to read and think and work out consequences in detail for another, say, 500 hours, like a professional that works hard, until he finally has a handle on the effects of his proposal.

["Magazine-Cover-Indicator"Indicator....]

When I say 500 hours, I'm not exaggerating or using hyperbole. When you propose a plan this momentous and gigantic, you need a proportional amount of work to it's significance and risk.

[Russ Abbott]

As I understand the plan a homeowner could sell the government $125,000 worth of equity in exchange for the government assuming $100,000 of the loan on the house.

How would the government's equity be recorded? Would it come after all other loans? Would there be an appraisal to assure the government that there is $125,000 of equity? If so, this wouldn't help the people who are under water. (Presumably we don't want to prop up those house prices anyway.) So it would only apply to people who have $125,000 in equity in their houses. Why would someone in that position want to sell $125,000 worth of equity for $100,000?

[QualifiedBuyer]

How about letting the free market take its course, and punish those that took the risk. And instead of bailing out the wrong- doers, provide low interest loans for affordable housing to qualified buyers with excellent credit, verified income, significant down payments and the intellegence not to get over-extended in the first place. Essentially purchasing performing loans, instead of the junk the fed now carries on it's balance sheet (ever wonder why the large financial institutions are looking healthier). Just a thought.

[iThinkBig]

Let the free market reward the responsible and punish the irresponsible. Right now I am not seeing that happening, I am taxed through inflation to bail out irresponsible banks and looking at paying for $300 B bailout for builders, house flippers and the stupid that don't bother reading contracts. A plan would be let free market work, housing falls to bottom, new buyers enter the market. On top of that if your going to take $2.7 T from the Treasury, I want the money applied to wealth creation, investment opportunities and jobs. Energy is just such a market that could counter balance a lot and eventually return the U.S. to much better times, never mind a better foreign policy.

[ponchovilla]

Seems to me Philip Davis is ready to be the next Secretary of Treasury so he can give advice to Ben Bernanke.

[Marvelous]

When I first read his idea, I thought "YES" -- very innovative...
just what is missing from our presidential candidates!!! Then I
read the mostly negative comments... which I largely agree
with... BUT... am I the only one (perhaps old enough) that
remembers a similar plan where the government (you & me)
made a PROFIT on the so-called "bailing-out"... of CHRYSLER???

[c smith]

Same silly thinking which got us into this mess...the entire scheme relys on houses appreciating so the Feds can come out ahead. Let the market find equilibrium...likely another 15% to 20% down for Case-Shiller (to late 2003 levels). Writedowns on mortgage paper already exceed this level of home depreciation, so the investment banks are done with writedowns on CDOs. Commercial banks will still suffer for another 6 to 12 months (they've done less mark to market), but we'll get through it. Nutty idea.

[Hoot85]

I can't remember the exact quote, but Benjamin Franklin once said something along these lines: The beginning of the end for a democracy happens when that democracy realizes that it can vote itself money."

Depending on the connotation, this can apply to our current situation. All the "guvmint" is doing by intervening is delaying the inevitable, and making it worse at the same time. If we would let the FREE MARKET run its course, first it would overshoot its equilibrium. Once that happens, the market will recover completely, anew and stronger than ever.

[peg_investor]

The most idiotic article I have read so far on housing. Just ridiculous.

[Big BearLake Hostel]

angryrenter.com

[CJ-49]

I have read Phil Davis for a long time now and I would suggest you all up there get off your petty egotistic haven of govt-is-always-bad fixations and take time to read what he says. However it sounds like most of you lot know little about Macroeconomics and lots about whining-onomics. I think Phil's suggestions are clever and even if unlikely to be implemented they are still worth thinking about. Even when he is wrong his points are quite good. I have a lot of respect for his views and I find to be disrespectful to him one must be good. Most of the spiteful-for-the-sake-... critics above have shown little if any sign of intelligence enough to qualify remotely to be disrespectful.

[Jet Jock]

Like someone else said, how did this missive find it's way to the top of the list on "Seeking Alpha?" This is trash thinking of the highest magnitude.

Appalled here!

[pharma]

This is nice: if somebody can not or does not want to pay his/her mortgage, no problem since US government will pay for it.

Just a simple question: why will anyone in a sound mind pay his/her mortgages? There is no need for it. Just grab $100M mention and don't pay.

I like it very much.