Here's today's squeak from the wheel. If it sounds familiar, it ought to. We keep saying the same thing ... because the government and the prime movers in the financial centers keep doing the same thing. As always, feel free to plagiarize and send your own letter or e-mail to anyone you think 1. might be interested, or 2. might be able to do something ... like take a look at the proposals.
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It's true that the federal government is going to have to take aggressive steps in the immediate future to protect the banking system. Advocating the formation of yet one more government agency, however, is going about it the wrong way ("Review & Outlook: Wall Street Reckoning," WSJ, 09/15/08, A22). Another Resolution Trust Corporation to acquire real estate and mortgage assets is unnecessary when there is a viable private sector solution that will benefit taxpayers instead of loading them with yet more debt. The federal government should immediately begin studying the feasibility of an innovative "rent to own" vehicle that would be called the "Homeowners' Equity Corporation" or "HEC."
Assuming appropriate legislation could be passed, a HEC would be a for-profit stock corporation 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 to spread the risk and pool it, similar to the manner in which conventional insurance operates. 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 sufficient to cover debt service, maintenance, and taxes were made. 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 — to say nothing of taking care not to add another $5 trillion or so of unserviceable debt to the already staggering burden of the federal government.
This innovative alternative would require some enabling legislation from Congress to give it powers similar to those currently enjoyed by leveraged ESOPs. Then let the private sector HECs take over the whole mess in a way that delivers the greatest good to the greatest number of people at no cost to the taxpayer without creating another government agency or burdening taxpayers with more debt.
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