I’m no economist, and I won’t be surprised if this idea is fundamentally unsound, but here it is. We need to get these bad loans off the books of our financial institutions in order to open up credit markets. But rather than buying the loans (which are so hard to value), why don’t we acquire the underlying properties of defaulted loans then rent them to the current occupants? We can buy them at a steep discount. I don’t know, maybe the government pays 75% of the current value or (to make it easy) 50% of any appraisal prior to April 1, 2008. The mortgage holders lose money, but that should happen anyway.
- People who stand to lose their homes and otherwise be out on the street become renters, which they probably should have been all along.
- We eliminate the problem in which homeowners who continued to pay their mortgages don’t feel like their neighbors who couldn’t pay their mortgages received an unfair bailout.
- We don’t have to value the derivative securities, which is very hard.
- The mortgage holders and those with credit default swaps (CDS’s) share in the downside, paying some of the cost for their recklessness.
- We have the potential upside due to the discounting.
- The government auctions the acquired properties, spread out over a 5- to 10-year period (selecting the properties randomly) to avoid depressing the real estate market further due to a flood of properties.
- Ultimately we make a profit. Our dollars are going into tangible real estate, not some abstract financial instrument.
- We may want to do this through state and local governments rather then federally. The more local we make it, the easier it will be to manage and maintain the properties. The federal roles are (a) to provide funds, (b) to set standards, and (c) to audit the process.
At an average home price of $215,000 and a 25% discount, $700 billion allows us to acquire nearly four million homes, even including a 10% cost to administer the program. If we need to acquire more than four million homes — something we should be able to determine easily — we reduce the amount we pay to the current mortgage holders. If it’s less than four million homes, it costs us less than the $700 billion in the Paulson plan.
Like I say, it’s an amateur idea and probably flawed, but I like the facts that (a) it’s simple, (b) over time, the government gets out of this (as homes are sold), so it doesn’t create a permanent beauracracy, (c) no one gets rich, and (d) no one loses the roof over their head.
Tell me why this won’t work.
Update: Still waiting for an expert to point out the flaws, but I’m getting a lot of supportive email. If you like the idea, email your senators and congressperson with a link to this page. I’ve sent it to Boxer, Feinstein and Rep. Woolsey. If you have a Senator on the Banking Committee or a rep on the House Financial Services Committee, even better.