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On Rescuing Homeowners Undergoing Foreclosure

Smarty Pants, you've actually missed my point. i'm not suggesting that home values shouldn't fall. Nor am I suggesting the government should tax everyone to pay for this (although the current plan, as opposed to mine, does exactly that).

I'm trying to avoid a deep recession. I'm merely saying that consumer spending is a function of life-cycle wealth (Modigliani). If home values have declined, total wealth has declined and spending will recede causing a steeper recession. My plan merely attacks the current supply/demand equation -- i.e., supply far outrunning demand. Over the long run, my plan does not lead to inflated home values; in the long term, home values will be exactly where they'd be without the SFRET. The difference, however, is that under the SFRET plan the cost of this bail out is born by those who needed the SFRET to avoid bankruptcy. In the short and intermediate terms home values will not plummet and consumer spending will remain at reasonable levels staving off a deep recession.

Call it a lucky hunch, but anyone who is saying that home values should plummet and the economy should go into a deep recession, is most likely not a homeowner nor gainfully employed outside of government or academia.

i'm comfortable with the real estate purchases I made and the cushion i have to withstand it. But, undoubtedly, my spending habits will change if the value of my property declines and that has a direct affect on GDP.

On Rescuing Homeowners Undergoing Foreclosure

I disagree; there is a solution that will greatly mitigate the problem...i have sent it to the sentate banking committee since March...

--- On Mon, 3/24/08, <@yahoo.com> wrote:
From: <@yahoo.com>
Subject: Housing Crisis -- "Protect our Property Values" Plan
To: [e-mail]....
Date: Monday, March 24, 2008, 8:39 PM
For those of us who played by the conventional rules for buying a home – saved money for the appropriate down payment and borrowed an amount that did not exceed our salaries’ ability to service – we look at the current housing crisis and wonder how foolish we were as lax lending standards permitted unqualified borrowers to ultimately devalue our primary asset and as irresponsible lending practices by regulators and bankers fueled the bubble without regard to the disaster they were creating.

Right now politicians are sitting around either talking about ways to save the irresponsible borrowers or devising plans to bail out the banks that recklessly inflated this bubble.

Our politicians are pandering to the foolhardy and mindless instead of searching for solutions that seek the following outcomes:
(1) preserve the home values of responsible investors (by far the vast majority of homeowners in this country);
(2) recover tax dollars from those responsible for the inevitable bailout currently underway; and
(3) construct the right regulatory framework so that future profligacy will be avoided

Painful as it is to say, to protect responsible borrowers’ primary asset, politicians must bail out reckless borrowers. In the absence of this assistance the responsible parties will continue to suffer as their property values unjustly fall as the supply of homes from defaulting sub-prime borrowers floods the market.

Politicians must collect taxes from the irresponsible parties. To do that they need to design a special federal real estate tax (SFRET) whereby “qualified” sub-prime borrowers (i.e., those who can continue paying their mortgages at their current rates) will be permitted to keep their homes and maintain their mortgage payments but accumulate tax liability payable within 20 years or when the property is sold or transferred, for example, to family members. The SFRET payable will be a percentage of the borrowed funds and will grow each year but be capped at 50% of the funds borrowed and be payable within 20 years. (After 20 years SFRET homeowners can still own their SFRET properties but will have to refinance and pay taxes due.) The longer those SFRET home owners hold their homes the greater the percentage they will pay. Thus there is an incentive for SFRET homeowners to get their financial house in order quickly, sell their SFRET properties and purchase properties unfettered by SFRET tax liabilities.

(In the immediate term the SFRET solution will stifle the over-supply of homes on the market -- because SFRET owners will keep their homes instead of defaulting on their mortgage obligations -- which will restrain further downward pricing pressure on home values. SFRET property owners will have to wait till their properties appreciate enough to repay their loans and pay their SFRET taxes. In the intermediate term as home values start to move up in value SFRET property owners will undoubtedly try to sell their properties tempering another potential real estate bubble from developing. In the long run when property values have appreciated to the point where SFRET properties can be sold and SFRET taxes repaid in full without any risk to the financial system, property values will reflect the current demand and supply conditions for real estate.)

The treasury coincident with the introduction of the SFRET program should float SFRET bonds based on the present value of future SFRET receipts. Wall Street firms who helped fuel this bubble and who are now enjoying the current Federal Reserve bail out should be obligated to purchase these bonds which will carry an interest rate 100 basis below current treasury bond rates.

As with any program that holds accountable the responsible parties, borrowers who are right now counting the days, weeks, and months before they face their inevitable default and bankruptcy will still find this SFRET program unfair even though it bails them out of bankruptcy, permits them to retain their homes and gives them the opportunity to enjoy the appreciation of their home in the long run. Essentially, those that find the SFRET unfair are looking for a free-ride – a bailout without consequences. Those that find the SFRET solution unfair have two choices, declare bankruptcy or sell their homes quickly to get out from their growing SFRET liability.