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Thursday July 24, 2014 
by Christopher Chantrill Follow chrischantrill on Twitter

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Reviewing Obama's "Blueprint for Change" Bill Buckley's Conservative Family

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The Home Equity Partnership

by Christopher Chantrill
March 02, 2008 at 7:59 am

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LET US SUPPOSE that the mortgage meltdown has about finished melting and that some sort of recovery will shortly begin. The Federal Reserve Board has aggressively reduced interest rates from the 5.25 to 3.0 percent. And the seized-up interbank loan market appears to have eased, with the LIBOR 3-month interbank rate now close to the fed funds rate.

That means that the real-estate problem is solved, and that we can all relax, right?

Maybe that’s our liberal friends, authors of the current mortgage subsidy edifice, can relax. But not conservatives.

The problem with the real-estate market is that it forces ordinary people to use far too much leverage. Americans are mostly pretty conservative about their finances. But for many Americans the only way that they can afford a home is by accepting a very risky proposition, borrowing 80 percent or more of the purchase price of their home.

It was not always thus. Before the Great Depression Americans seldom borrowed more than 50 percent of the purchase price on a home and mortgages were seldom written for a term longer than ten years. But the housing meltdown of the 1930s encouraged the federal government to introduce a range of subsidies for home ownership including the Federal Home Loan Bank and the federally insured Savings and Loan Associations with their 30 year fixed mortgages. In 1938 the Feds created the Federal National Mortgage Association, Fannie Mae. And of course mortgage interest is deductible from US income tax.

With the government underwriting home mortgages lenders could afford to offer homeowners higher and higher leverage.

This sort of high-stakes homeownership is wrong, and it is wrong for politicians to encourage it. Highly leveraged investing is all very well for hedge funds and their rich customers. But it is wrong to lure ordinary American homeowners into such a risky scheme.

As a young thirtysomething friend said to me: “I didn’t know.” She bought a home in the final up-leg in 2005 of the late great real-estate boom. People told her that real-estate was a good investment, and the banks and real-estate agents were happy to sell her a mortgage. But she didn’t know that all booms end in tears. Now she’s moved out of town and the house is under water.

High leverage is for the finance professionals, not for young professional couples with a young child and another on the way.

If highly leveraged homeownership is wrong, then what should replace it?

The answer is pretty obvious, and I’m rather disappointed that nobody has suggested it. We need less debt and more equity in the real-estate business. But how do you use get more equity when you don’t have the cash to put down? You take on an equity partner to lower your risk. Let us call it “home equity partnership.” Here is how it would work.

You buy a house and you get a 50 percent mortgage on a $200,000 purchase price. But, of course, you are a thirtysomething and you don’t have a 50 percent down payment. So your realtor sets you up with a home equity partnership offered by retail financial institutions and on the web. You put down 20 percent of the purchase price, or $40,000 and a “partner” kicks in 30 percent.

This means that the equity in the home is shared between you and the partner. If you sell the house in five years for a $100,000 profit then you get $40,000 and the partner gets $60,000. That’s not the sort of thing you can boast about at parties.

But look at what happens on the downside. Suppose there were a mortgage meltdown and your home’s value went down 20 percent. If you had taken out an 80 percent mortgage you would be out your entire $40,000 down payment. But you didn’t. You only had a 50 percent mortgage, and the rest was financed with a home equity partnership. So the $40,000 loss is shared with your equity partner. You are out 40 percent of $40,000, or $16,000 and your partner is out $24,000. The house would have to lose 50 percent of its value for your investment to get wiped out.

Here’s the $64,000 question. What would an equity partnership like this be worth? Would the homeowner pay a premium to the partner? Would the partner pay a premium to the homeowner for the opportunity to participate in the real-estate venture? Would it be a wash? As the homeowner pays down the balance on the mortgage would the equity shares be adjusted? On what terms could the homeowner buy out the equity partner?

Here are some more questions. Would this plan reduce the “payments” the homeowner paid on a mortgage? Would the homeowner gradually buy out the partner’s share? Supposing the equity partner wanted out?

Then there are the technical questions. Would a real-estate equity partnership be practical? Would there be opportunities for fraud that would kill the whole concept? Would homeowners accept the idea of a partner getting a share of their home equity?

Nobody knows the answers to any of this.

But we do know that the current system of enticing young families into the risky scheme of highly leveraged real-estate speculation is wrong and there ought to be a law.

And politically, what’s not to like? Conservatives are desperate to encourage the American people to buy into the notion of ownership and equity and to earn themselves independence and self-respect. Our liberal friends are desperate to bury everybody in a rising tide of debt and subsidy that makes them more and more dependent on government and liberal programs when things go south. We are right and they are wrong.

Let the new home equity partnership be the first step towards a new Conservative Equity Society.

Christopher Chantrill blogs at www.roadtothemiddleclass.com.

Buy his Road to the Middle Class.

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 TAGS


What Liberals Think About Conservatives

[W]hen I asked a liberal longtime editor I know with a mainstream [publishing] house for a candid, shorthand version of the assumptions she and her colleagues make about conservatives, she didn't hesitate. “Racist, sexist, homophobic, anti-choice fascists,” she offered, smiling but meaning it.
Harry Stein, I Can't Believe I'm Sitting Next to a Republican


US Life in 1842

Families helped each other putting up homes and barns. Together, they built churches, schools, and common civic buildings. They collaborated to build roads and bridges. They took pride in being free persons, independent, and self-reliant; but the texture of their lives was cooperative and fraternal.
Michael Novak, The Spirit of Democratic Capitalism


Taking Responsibility

[To make] of each individual member of the army a soldier who, in character, capability, and knowledge, is self-reliant, self-confident, dedicated, and joyful in taking responsibility [verantwortungsfreudig] as a man and a soldier. — Gen. Hans von Seeckt
MacGregor Knox, Williamson Murray, ed., The dynamics of military revolution, 1300-2050


Society and State

For [the left] there is only the state and the individual, nothing in between. No family to rely on, no friend to depend on, no community to call on. No neighbourhood to grow in, no faith to share in, no charities to work in. No-one but the Minister, nowhere but Whitehall, no such thing as society - just them, and their laws, and their rules, and their arrogance.
David Cameron, Conference Speech 2008


Socialism equals Animism

Imagining that all order is the result of design, socialists conclude that order must be improvable by better design of some superior mind.
F.A. Hayek, The Fatal Conceit


Sacrifice

[Every] sacrifice is an act of impurity that pays for a prior act of greater impurity... without its participants having to suffer the full consequences incurred by its predecessor. The punishment is commuted in a process that strangely combines and finesses the deep contradiction between justice and mercy.
Frederick Turner, Beauty: The Value of Values


Responsible Self

[The Axial Age] highlights the conception of a responsible self... [that] promise[s] man for the first time that he can understand the fundamental structure of reality and through salvation participate actively in it.
Robert N Bellah, "Religious Evolution", American Sociological Review, Vol. 29, No. 3.


Religion, Property, and Family

But the only religions that have survived are those which support property and the family. Thus the outlook for communism, which is both anti-property and anti-family, (and also anti-religion), is not promising.
F.A. Hayek, The Fatal Conceit


Racial Discrimination

[T]he way “to achieve a system of determining admission to the public schools on a nonracial basis,” Brown II, 349 U. S., at 300–301, is to stop assigning students on a racial basis. The way to stop discrimination on the basis of race is to stop discriminating on the basis of race.
Roberts, C.J., Parents Involved in Community Schools vs. Seattle School District


Postmodernism

A writer who says that there are no truths, or that all truth is ’merely relative’, is asking you not to believe him. So don’t.
Roger Scruton, Modern Philosophy


Physics, Religion, and Psychology

Paul Dirac: “When I was talking with Lemaître about [the expanding universe] and feeling stimulated by the grandeur of the picture that he has given us, I told him that I thought cosmology was the branch of science that lies closest to religion. However [Georges] Lemaître [Catholic priest, physicist, and inventor of the Big Bang Theory] did not agree with me. After thinking it over he suggested psychology as lying closest to religion.”
John Farrell, “The Creation Myth”


Pentecostalism

Within Pentecostalism the injurious hierarchies of the wider world are abrogated and replaced by a single hierarchy of faith, grace, and the empowerments of the spirit... where groups gather on rafts to take them through the turbulence of the great journey from extensive rural networks to the mega-city and the nuclear family...
David Martin, On Secularization


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©2012 Christopher Chantrill