Monday, September 8, 2008

We Can Do It, By HEC!

Here's another squeak from the wheel to see if anyone is listening and willing to grease the way toward a more just and humane future for us all. As always, please feel free to steal these ideas and write your own letters, whether to the newspapers or the candidates.

Dear Sir(s):

It's encouraging to see the Wall Street Journal continue to stand up to the "heads-I-win-tails-you-lose" philosophy behind the increasing number and scale of government bailouts ("Review & Outlook: Weekend at Henry's," 09/08/08, A18), especially for the clay-footed mortgage lending giants. The belief that an omniscient and omnipotent State will save everybody from everything is at the heart of much of what ails the United States and the rest of the world in this and other areas.

One thing more is needed, however, for the Journal to have the beneficial impact we desperately need. That is to propose a sound, free-market solution to the economy that empowers ordinary people instead of Big Government, beginning with the housing crisis, now spreading from sub-prime loans into the prime area. Instead of burdening the taxpayers with yet another bailout, 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. After that, the free market can render its judgment by allowing Fannie Mae and Freddie Mac to reorganize via Chapter 11 after divesting themselves of distressed properties to HECs instead of going club in hand to the American taxpayer. Otherwise, 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.

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