I have been concerned about the national debt since I first took economics classes in the early 1980's at Boise State University. I have finally thought of a way that might help pay it off!
While a lot of the people are asking for mortgage write downs (cram downs) due to the economic adjustments made in housing values nationwide, I am suggesting almost a diametrically opposed solution. Mine is not a quick fix answer, since in physics, I also learned that for every action there is an equal and opposite reaction!
There are now thousands of blogs suggesting we did just drop all mortgages down to current values (and the LTV requirements thereof), yet I have not seen a single economist suggest it! If we did take such action, this would stop some of the defaults on mortgages, but would cause defaults on the banks thereby impacting even the retired people that have their life savings in there with a free and clear mortgage!
If we were to buy into this idea of writing balances down to fair market value, does that mean my credit card balance should be written down to zero since there is no current value of the meal I charged last month?
If we were to buy into this idea of writing balances down to fair market value, will we have to do this for all the automobile loans out there too since the cars are worth less than they day they were purchase?
Can we just write off the portion of the national debt that was run up to fight the war in Vietnam, the Iran Contra Affair, Desert Storm, etc., since those are also in the past and of no present value?
Since this logic path isn't logical, I have been thinking of an actual solution instead of just buying into the problem! I still have a lot of fine tuning to do, but think my concept is close enough that I can forward it to Dr. Lawrence Yun - NAR's Chief Economist so he can decide if it has merit or not. Unfortunately, I did not have this idea in time to submit to NAR for their "Game Changer" challenge in 2009.
My idea is relatively simple, if the US Government lends you the money to buy your home, they are essentially your partner and therefore could offer a "Shared Equity Participation Loan" in some cases. Since NAR statistics have shown that the average home appreciates long term at a rate of 3.8%; they could benefit from the future appreciation that resulted from this partnership. For example, if you bought a home for $200K that appreciated 3.8% a year for 5 years, that home would be worth $240,999! If you took out 12% of that cost for the net cost of acquisition and sale you would still have a net profit of $36,079. If the US government provided 17% of the money (80% first mortgage + 17 US + 3% borrower's funds = 100%) then they would be entitled to 17% of that profit or $6,133.57. If you paid cash for the home or put down 20% so you didn't need FHA or VA's help, you keep 100% of the profit (less your capital gains tax if any).
If the Debt Clock above is accurate, and there is over $14 Trillion in mortgage debt in the US. According to a Reuters article I read, government insured loans are now over 38% of the market, up from a record low of 6.8% in August 2005. So, if you multiply the $14 Trillion in mortgages by 38% of the market and if they averaged 17% of the down payment (assuming an FHA loan) that is still $921 Billion! If that number appreciates by the long term average of 3.8% - that is a $35 Billion gain annually! If only 20% of the gain is paid back, that is still $7 billion a year! At that rate, the US can pay off it's entire national debt in only 7,831 years!
Does anyone have a better plan?
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