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I first published this idea in March of 2008. It’s too bad Congress is ruled by people who have absolutely no business acumen. If Congress had acted in 2008, our housing crisis would be (mostly) over. America’s economy would be moving in the right direction.
The fundamental concept is still valid. Will a Republican Congress do any better?
Probably not... But one can hope for a miracle.
Thanks to Investment Bank amorality and Congressional regulatory failure, our banking system is still saddled with a ton of residential foreclosures and disastrous commercial property loans. Small business activity has been strangled by a dysfunctional banking system. We are headed for another financial crisis.
We need a fix. Here is an over-simplified explanation of my proposal.
Fix America’s Banking System
You may remember the Office of Thrift Supervision set up the Resolution Trust Corporation in the 1980s to deal with hundreds of insolvent thrifts. Given its relative independence and management skills, the RTC was able to move quickly to dispose of rotten assets. We can do that again. Allow desperate banks to sell their non-performing loans to a property management company at the lesser of book or market value. This sale could only occur once. The bank balance sheet would carry the sale as an “Deferred Asset”. The Bank would not receive any cash from the Property management Company. Instead, it receives a note for each transferred property and treats the value of the note as a capital investment. That helps to clean up the Bank’s balance sheet and reduces the need to bolster reserves. We presume the Bank could then focus its attention on being an active and constructive part of America’s financial system.
The Property Management Company (PMC) would treat the property as an asset and the loan as a debt. Additional Government loans would provide the capitalization needed for PMC operations until the PMC is profitable. The PMC’s objective is to maximize the return on invested capital by either selling or renting each acquired property. Income from sales or rentals would be used to pay off Bank and Government loans. The PMC takes a percentage fee from realized income to fund operations.
The PMC assumes responsibility for property maintenance and improvement, as well as rental and sales activity. This solves the problem voiced by several Cities that abandoned properties become liabilities to the community because they are targets for vandalism, illegal activity, and neighborhood deterioration. It also increases the availability of “affordable” housing.
We could offer two unique rental contracts as an option.
1. The renter signs a long term agreement. A portion of each months rent is allocated to a down payment option escrow account. The idea is that at any time, the rental tenant has an option to convert the rental contract into a sales agreement at a pre-determined price. The down payment would come from accumulated funds in the escrow account and whatever other financial resources that are available to the renter at the time. On the other hand, rental tenants who need to move elsewhere could simply give notice, and vacate the property. Funds accumulated in the escrow account would then be used by the PMC to help pay down the loan value.
2. A new homeowner could sign an agreement wherein the RMC receives a percentage of any gain received when the home is sold. This increases the probability the RMC can recover at least some of the cost basis of its investment in the property, and adds to the flow of funds to repay the RMC’s debt obligations.
Since every real estate market is a little different, we should probably look to the creation of regional and local PMCs, rather than one big PMC. These could, in turn, be under the supervision of an appropriate federal government agency. Non-performing assets can be converted into income producing properties. Additional affordable housing becomes available for low and middle income groups.
Put Thousands Of Americans Back To Work
This proposal creates thousands of new jobs. Increased loan activity means more jobs in the Finance Industry. Increased real estate activity will provide jobs for thousands of real estate property management employees, and put thousands of real estate agents, appraisers, and loan brokers to work. Property renovation and maintenance will provide jobs for thousands of plumbers, carpenters, electricians, contractors, and maintenance workers. There will be an increased demand for truck drivers and equipment operators. Increased real estate market activity increases the tempo of employment activity at hardware, lumber, equipment, and other supplier companies. Retail sales pick up. Even local coffee shops benefit!
Message to Congress. We need to bite the bullet. Get our economy back on track!
Of course there will be opposition to my proposal from those who have a vested interest in the status quo, those fearful of the outcome, those whose vision is obscured by the fog of ideology, and those who have no clue as to what in hell is going on.
But try we must. And take the bitter medicine. Otherwise, there is no limit to the downside risk. Think stock market crash. Higher rates of unemployment. Destitution. Poverty far worse than the 1930s.
Is that what we want?
Let’s all pray for a miracle. Congress actually fixes the problem. Before it’s too late.
Ron
Reference 1: How To Save America’s Banking System, TCE, March 2008
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