The Wall Street Journal is properly worried about the effect the mortgage crisis is having on the economy ("Bank Stocks Drop Anew Amid Worry Over Falling Home Prices," WSJ 08/13/08, A1). Unfortunately, by focusing on the secondary market for bank shares,
the primary market for family homes tends to fall by the wayside. With the over-emphasis on "saving" the lending institutions and brokers that got us into this mess in the first place, individual homeowners who have lost, or stand to lose their homes are left out in the cold. Is there anything that can be done to address this situation?
We have a radical, even revolutionary thought: why not let ordinary people have the power to join in free association with others and solve the problem themselves? Let private citizens organize into "Homeowners' Equity Corporations" — "HECs" — and permit the free market to operate properly. This is certainly preferable to having the government further undermine the economy and the free market by maintaining an artificial near-monopoly.
A HEC is a proposed for-profit stock corporation, described on the CESJ web site, whose shareholders would be homeowners in danger of foreclosure. HECs — and there should be many, to provide redundancy, lower risk, and ensure competition in a community — would purchase distressed properties at the current market value. HECs would obtain acquisition loans from commercial banks, which in turn would discount the loans at the local Federal Reserve at a rate reflecting transaction costs and a revised risk premium. The homes could then be leased at a realistic market rate to their former owners or new tenants.
The tenant would earn shares in the HEC as lease payments were made sufficient to cover debt service, maintenance, and taxes. When the acquisition loan for a particular property was fully paid, the tenant could exchange his or her HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover maintenance and property taxes.
Financing the purchase of properties through the Federal Reserve System and its member banks would cost the taxpayer nothing and be the first step in restoring a currency backed by hard assets instead of government debt. Let the free market decide what happens to Fannie Mae and Freddie Mac. This innovative alternative may require some enabling legislation from Congress to give it powers similar to those currently enjoyed by leveraged ESOPs. After that, the State can step aside, and, except for its regulatory role, let people solve their own problems without imposing any more burdens on the taxpayer, increasing entitlements, or bailing out institutions "too big to fail."
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