Dear PBO #6 – Housing Part 2

Below is my letter to the President regarding the economy; it is in summary form.  To see full details click the Dear PBO page and go to the September 20 letter.

Dear Mr. President

 Back in July I wrote to you concerning the housing crisis.  As you may recall I indicated bankers needed to take a greater role in what they helped create and not place the entire burden on those who were losing their homes.

 As I have studied the issue further I believe there is still another alternative to helping those in trouble, helping the bankers get back to doing what they do best and speeding the recovery of the housing market.  It starts with the government but ends with the marketplace.

 The United States governments’ two most powerful and potent assets it can use for economic change is its credit rating and tax credits.  Despite what the credit agencies say, the credit standing of theU.S.is still looked upon as the strongest in the world.  And while in the eyes of Americans it is weaker, it still can be relied upon as solid.  Tax credits, for many, are better than gold.  They are cash in the pocket and not volatile.

 The use of each of these assets by the government would come about to change behavior – the prime methodology of leaving a recession and growing an economy.  Each of these requires parties receiving them to do something – something favorable to improving the economy and the lives of Americans.  This replaces all the “throw some money at the problem and see what sticks” approach and puts in place real decisions, by real investors; and as it works, costsAmericanothing.

 For the majority of foreclosed properties (or even those on the verge of foreclosure) a new owner is sought.  The owner is an investor.  Each home is sold to the investor for the current mortgage balance of the property.  The bank, not having to write off a loan or pay the significant costs of foreclosure decreases the interest rate to 1% and rewrites the note with the investor as borrower for 30 years.  The homeowner rents the home for an amount lower than the original mortgage payment, but not less than 50% of the original payment.  The investor gets a tax credit annually for the difference between the bank payment and the rent payment, if any.  The investor can also write off the negative amount (as business expense) the difference between the rent and bank payment is negative.

 The investor must agree to hold the property for a minimum of five years.  The original homeowner can, at any time during the five years, repurchase the home under current conventional lending standards for the balance outstanding on the investors note plus all the negative payments (difference between bank payment and rent) plus 50% of the fair market value, if any, at the time of sale and this gain is tax free.  At the end of the five years, if the home is still owned by the investor and the investor can sell the property.  If the sale results in a loss, the investors can take the loss on investment as receive an additional tax credit on the difference of up to 15% of the original investment.

 To entice the bank to lend in the current conditions, the government will provide a guaranty backing the investor’s note.  The bank can only collect if under normal banking conditions cannot secure full payment.  An example of this plan is attached.

 Under this plan, the value of real estate stops falling and begins to slowly return to normal – certainly not the “go-go” values pre-2008, but normal values.  Investors can put their money to work constructively and with a sound rate of return in this era of low interest paid on investment.  This keeps the banks from continuing to write off loans and helps stabilize the banking industry.  And families can find some relieve from fear and financial distress and stay in the family home stabilizing the family unit and hopefully accelerating consumer demand for other products and services – the other leg of a strong economy.

 The final requirement is that families who are able to return to their homes under this program agree not to sue the bank or the investor relieving each of the burdens of possible litigation costs.

 Everyone pays a little, everyone gains, the government provides the catalyst for stabilization without costing anything up front and the country, as a whole is much better off and we get our economy and lives back.

 Thanks for the listen – until next time.

  Sincerely

 Thomas K Sheehan

Sheehan Financial Group

bizfinancejournal.com

 

 

 

Example

 

Investor “purchases” home with $127,000 bank balance on an original loan of $135,000 at 5% for 30 years – a $725 monthly payment (a $142,000 home).  Actually there is no up front cash from the investor – just good credit history to make the payments.

 

Family rents the home for $362 per month plus 1/12 of the property taxes and insurance.  Investor pays bank $408 per month ($127,000 at 1% interest for 30 years).  Investor gets an annual tax credit of $552.  Normal write off of depreciation and interest apply.

 

Assuming the home value at the end of five years has returned to $142,000, the sale is made and the investor makes $2,760 (difference in rents and payments over 5 years), plus $15,000 ($142,000 less $127,000) in tax credits.

 

The family purchases the home for the balance on the loan which is $108,400 plus the $2,760 in rent/payment differences and finances this amount ($111,160) which is 78% loan to value – a proper real estate spread.

 

Bank earns 1% on its loans and recovers is capital while avoiding foreclosure costs.

 

Treasury is out $17,760 in tax credits offset by bank earnings on loan.  Better economy and resulting taxes should dwarf this “investment”.

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