Here is an example on how to develop a timely home purchase incentive plan and a self-funded economic stimulus plan at the same time. To stem foreclosures and keep people in their homes in a socialist mind set is not enough, we need to have a free market based stimulus plan to get people to come back to the real estate market to ensure on-going prosperity. Our country’s and hence the global economic prosperity hinges on the continuing consumption power of the American citizens. Nothing is more effective than to shore up the home value for every American to fix this global economic problem.
To borrow the 100% free market based SwapRent based solutions and concepts as a temporary wealth and welfare creation policy proposal is very simple. Few people currently would expect the US real estate market is going to recover in the next few years. It would be an easy decision for many homeowners and many would-be new property investors to voluntarily agree to temporarily give up a part (say 25%, 50% or 75%) of the future appreciation potential for the next 2 to 5 years and share it with the federal or local state governments in order to receive a “monthly income” from the government for the next 2 to 5 years. The monthly income to be received, portion of shared appreciation to give up and for how long will be determined through a transparent freely traded market for all participants. The transactions could also be designed to be “reversible” with certain lock-up periods and the homeowners can buy back the remaining maturity of the contract any time when they have the economic ability in the near future if their income situation changes.
The “incentive” resides in the generous pricing of these SwapRent contracts and should be open to all property owners and not restricted to defaulting homeowners only. All the other mistaken bailout concepts that call for granting preferential treatment to defaulting homeowners will only unavoidably foster moral hazard which will encourage and turn many more responsible citizens into voluntary willful defaults and cause more troubles for our economy. Just think of what you would do with your own home if a “bailout program” offers you the opportunity for a 20% write down of your mortgage amount for free. Wouldn’t that give you the incentive to join them? Our entire nation will become mortgage defaulters at the expense of the taxpayers! Any attempt in those incorrect bailout directions might even lead to a further downward spin of our economy.
Now the homeowners could use this SwapRent monthly incentive assistance fund for foreclosures avoidance, household consumption, starting a new business, buying a second home at a bargain price or any other purposes of their own choice to boost our national economy in order for our country to avoid a major recession. Money secured through this exchange of future appreciation potential will be treasured much more than an aimless free give-away from the Government that everybody else gets for no reason as well. The money obtained this way often has a real economically conducive purpose.
Government will be able to make more money back for the taxpayers along the way from selling these quantified appreciation units in the form of the SwapRent contracts in a secondary market to other free market domestic and foreign investors (and even to the very homeowners that have received assistance now in the future when their financial situations change) as more and more people start to take advantage of Government’s generosity in this incentive offer. A self-fulfilling melt-up scenario will automatically happen under the free market mechanism. This will bring back the profit driven motives that a capitalism free market normally relies on for its smooth operation.
From the homeowners’ perspective, making one half of 30% home value appreciation gain within the next 2 to 5 years will be a much better choice than losing the entire another 30% of home value decline if they do not take advantage of such an offer willingly, let alone the fact that they could pocket a handsome monthly income along the way for the next 2 to 5 years. Wouldn’t this be a good way to spend a part of the already allocated $700 billion dollars? Since all the Government needs is the reserve for the monthly subsidies it will not even take that much money to operate. In addition, the capital will be regenerated when the Government resells these SwapRent contracts to other free market investors. If the Government uses money to buy the entire distressed mortgages it would need a much larger sum and lose money for the taxpayers. On top of all that, whenever any other “bailout plan” asks homeowners to do refinance it will make MBS and derivatives investors unnecessarily lose money due to prepayments and may induce more banking credit crunch (a point that many economists have missed!) and homeowners will also incur many unnecessary transactional expenses. By the way, the current Hope Now for Homeowners plan is also asking the distressed homeowners to do refinancing and hence not good for the investors or the banks.
This SwapRent program could easily be embraced by both distressed homeowners and responsible citizens alike for its fairness and immediate effectiveness that save both homeowners and please note, all the MBS investors anywhere in the world. Most important of all, the current or future Administration who implements this plan will not have to be confronted with the question again on how to pay for all this due to the free enterprise self-funding nature.