|Reviewing Obama's "Blueprint for Change"||Bill Buckley's Conservative Family|
by Christopher Chantrill
March 02, 2008 at 2:59 pm
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 thats 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 didnt 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 didnt know that all booms end in tears. Now shes 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 Im 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 dont 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 dont 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. Thats 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 homes 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 didnt. 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.
Heres 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 partners 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, whats 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.
Buy his Road to the Middle Class.
When we began first to preach these things, the people appeared as awakened from the sleep of agesthey seemed to see for the first time that they were responsible beings, and that a refusal to use the means appointed was a damning sin.
Finke, Stark, The Churching of America, 1776-1990
In 1911... at least nine million of the 12 million covered by national insurance were already members of voluntary sick pay schemes. A similar proportion were also eligible for medical care.
Green, Reinventing Civil Society
We have met with families in which for weeks together, not an article of sustenance but potatoes had been used; yet for every child the hard-earned sum was provided to send them to school.
E. G. West, Education and the State
Law being too tenuous to rely upon in [Ulster and the Scottish borderlands], people developed patterns of settling differences by personal fighting and family feuds.
Thomas Sowell, Conquests and Cultures
The primary thing to keep in mind about German and Russian thought since
1800 is that it takes for granted that the Cartesian, Lockean or Humean scientific and
philosophical conception of man and nature... has been shown by indisputable evidence to be
F.S.C. Northrop, The Meeting of East and West
Inquiry does not start unless there is a problem... It is the problem and its
characteristics revealed by analysis which guides one first to the relevant facts and then,
once the relevant facts are known, to the relevant hypotheses.
F.S.C. Northrop, The Logic of the Sciences and the Humanities
But I saw a man yesterday who knows a fellow who had it from a chappie
that said that Urquhart had been dipping himself a bit recklessly off the deep end.
Dorothy L. Sayers, Strong Poison
I mean three systems in one: a predominantly market economy; a polity respectful of the rights of the individual to life, liberty, and the pursuit of happiness; and a system of cultural institutions moved by ideals of liberty and justice for all.
In short, three dynamic and converging systems functioning as one: a democratic polity, an economy based on markets and incentives, and a moral-cultural system which is plural and, in the largest sense, liberal.
Michael Novak, The Spirit of Democratic Capitalism
The incentive that impels a man to act is always some uneasiness...
But to make a man act [he must have]
the expectation that purposeful behavior has the power to remove
or at least to alleviate the felt uneasiness.
Ludwig von Mises, Human Action
[In the] higher Christian churches... they saunter through the liturgy like Mohawks along a string of scaffolding who have long since forgotten their danger. If God were to blast such a service to bits, the congregation would be, I believe, genuinely shocked. But in the low churches you expect it every minute.
Annie Dillard, Holy the Firm
When we received Christ, Phil added, all of a sudden we now had a rule book to go by, and when we had problems the preacher was right there to give us the answers.
James M. Ault, Jr., Spirit and Flesh
The recognition and integration of extralegal property rights [in the Homestead Act] was a key element in the United States becoming the most important market economy and producer of capital in the world.
Hernando de Soto, The Mystery of Capital