The US economy is in serious trouble due to the recent mortgage crisis and resulting inventory of houses on the market. The Federal Reserve has taken positive action, but has nearly reached the limits of what it can do by cutting the Federal Funds rate and backing illiquid institutions. There is an immediate critical need for a very large infusion of capital into the financial and housing markets.
The answer is staring the government in the face. One readily available large source of capital is individual IRAs, which hold many trillions of dollars. If these IRA funds could be released and directed to the mortgage lenders and to the housing market, we could possibly avert, or at least significantly shorten, the economic recession we now find ourselves in.
Creating a new type of investment vehicle, a bond or coupon, which could be held in an IRA is the answer. It would require legislation because this is not allowed today. IRS rule 4975 prohibits IRA transactions with related prohibited parties. The bond would be issued for the amount of a person’s current mortgage principal on their primary home, and be held in their personal IRA account as an investment vehicle. Ideally, the bond would be negotiated between the private sector IRA administrator and their IRA client to avoid a government agency bottleneck. All private IRA management firms would be required to issue the bonds.
Individuals would need IRA funds to pay mortgage balance if full. The IRA administrator would issue the bond and transfer the principal amount to the individual’s mortgage company, and the mortgage is paid in full. The IRA fund would continue hold the bond in the IRA account and the individual must buy back the bond in order to sell the house. The amount of disbursable IRA funds would be reduced by the amount of the bond. The entire process should be as electronically automated as possible.
If only 10 million people were issued these bonds for an average of only $100,000, the result would be $1 Trillion in paid-off mortgages. Many people have much more than $100,000 in their IRAs. It makes sense to allow them to use that money to invest in the best and safest investment they could ever make, their home. By executing the bond, the annual mortgage payment would become disposable income for the consumer to put back into the economy each year. If only 10 Million people were able to put back $10,000 per year into the economy, the result would be $100 Billion per year.
It all makes a great deal of sense to create an investment vehicle backed by the best investment and individual can make – their home. It makes no sense for someone with say $500K in an IRA to loose their home because they lost their job and can not pay their mortgage. It also makes sense because it is not some form of government bailout which rewards the bad behavior of mortgage companies and unqualified borrowers. Instead, it rewards the good behavior of those who have saved and invested in the economy.
Some of the benefits would be to:
- Release an enormous amount of capital trapped in IRAs into the housing market
- Immediately increase individual disposable income by tens of thousands of dollars each year
- Actually Increase federal, state, and local tax revenues by eliminating individual mortgage interest tax deductions, without raising tax rates
- Create demand for housing to reduce inventory
- Create jobs throughout the economy
- Create opportunity for some to purchase their first home, ‘debt free’
- Encourage individual IRA savings
- Reduce individual debt
- Increase needed liquidity for mortgage lenders
- Not increase the money supply and contribute to inflation
- Transfer the housing risk from the mortgage company to the individual home owner
Mortgage firms like Citigroup (NYSE:C), Wachovia (NASDAQ:WB), Washington Mutual (NYSE:WM), and National City Corp (NCC) are in desperate need of large infusions of capital and are diluting their companies to get it from private equity firms. Their 5 year stock charts look like a waterfall and their stock prices have fallen back to or near their all-time lows. Thrifts are in even worse shape.
The merits of creating such an investment vehicle are obvious and would benefit everyone involved. The individual gets more disposable income and a chance to live debt free, the capital markets get needed liquidity, the government collects more taxes, the housing market gets more demand, and the general economy gets a much needed boost. The IRA bond would be a win win win win win.
Disclosure: Author is short C, WB, WM and NCC.