Commentary by David M. Michonski
RISMEDIA, Oct. 2, 2008-Here is an idea that can help Main Street and might save Wall Street. It is not my idea but rather one that I heard last week when I participated in a national press conference all about the real estate markets. I have thought it through and I think it has merit.
The idea is this: rather than bail out Wall Street institutions and take over all their toxic mortgages, which to the average American seems like we are bailing out Wall Street executive’s bad judgment for the past seven years, why not do something that helps all homeowners and might instantly turn around the real estate market? A turnaround in the real estate market could turn around the mortgage markets and with that turnaround, the overall financial markets.
The idea is that the US Government-for some period of time (I suggest two years)-offer mortgages to all homeowners and would-be home buyers at a 30-year fixed rate, say, 4.5%. The mortgages would require 20% down payment or equity of 20% and would go only to individuals who fit today’s more reasonable lending standards, i.e. have a job, can verify their income, have the down payment, etc.
What would this do? Instantly, buyers would flood into the real estate market and 11 months of unsold existing home inventory would disappear fast.
Second, existing mortgage holders would race to pay off their mortgages and the money would go to the banks who lent it originally, re-liquefying them with cash from the refinancing.
Third, it would give hope to first time home buyers who by going out and buying would also unlock the lower end of the market. This would allow relocatees to sell and the move up buyer market to get moving up again.
Fourth, it would save the home building industry and those with projects started by pushing home buyers to them, thus saving their projects and the banks who financed them.
Fifth, it would stop the foreclosure madness and help turn that around (which helps the banks, too).
Sixth, it would create a large pool of good mortgages (versus the toxic ones Wall Street wrote). The US Government could then either keep these mortgages, or sell them. If they sold them, it should be an attractive alternative to long term treasuries or at least something that our investors overseas might like to re-invest their US Dollars into.
What’s more, the government might even ask for some equity upon re-sale that the buyer must give up in return for this “bail out.” I suggest 10% of the profit upon a resale as reported on their tax returns, before deducting their $250,000 to $500,000 deduction. Thus, the taxpayers would benefit from a rebound in housing in the future, possibly over the next 30 years. Alternatively, this equity kicker feature could be sold to investors and that would really make those mortgage securities attractive.
In fact, they could be so attractive that this scheme might end up costing the taxpayers nothing. Why? Because if the US Government originated $1B in mortgages and sold them, it would get back its $1B. If it financed $700B, it would likely get that back, too. Maybe less, maybe more. But it would get at least a collateralized debt obligation that helps taxpayers and jump starts our economy.
How many people would this help? Well, let’s assume the average home in the US is $250,000. An 80% loan represents a loan of $200,000. $1B in mortgages could create 5,000 sales. For the $700B Hank Paulson wants to give Wall Street, we could instead finance 3,500,000 mortgages for Main Street-instantly turning around the real estate markets. We are only selling 5,000,000 units a year now anyways, so this would really kick start things.
Banks would be re-liquefied. Taxpayers would get a deal that might not cost them anything. Millions of people could buy a home and those employed in such industries as the mortgage lending business (who would be used to originate), the furniture manufacturing business, the home insurance business, the housing construction business and in the real estate brokerage business would have incomes again, i.e. 20% to 25% of our economy would start rolling again. Re-liquified banks would now be able to lend again and get themselves out of lockdown. The economy might start moving again.
This plan provides a break for average Americans on Main Street, all of them, while serving to also help Wall Street indirectly. But this idea also leaves those Wall Street firms who acted irresponsibly in the past to pay for their sins. Punitive for Wall Street? Yes. A meltdown? Probably not. Rather it would be a melt up that starts on Main Street and trickles up to Wall Street.
How’s that for a real reversal of roles?
David M. Michonski is chairman and CEO of Coldwell Banker Hunt Kennedy in New York City.
For more information, visit http://www.cbhk.com/.