Simple Solution vs. Billions in Spending

PROBLEM: Real Estate in America is the mainstay of everyone’s life and until it is stabilized the economy has a minimal chance of improving.

FACTS BEARING ON THE PROBLEM:

1. Real Estate Values soared to un-supportable levels from 2004-2007.
2. Lending Guidelines’ were severely compromised and many non-qualified individuals received mortgages.
3. Real estates upward spiral stopped, causing a number of defaults by overleveraged homeowners.
4. Holders of mortgages such as Fannie Mae, Freddie Mac, banking institutions, bonds funds, etc (who had also overleveraged themselves) suffered significant loses.
5. The market for mortgages (Mortgage Backed Securities) has dried up with very few buyers, even with excellent clients now qualifying under very stringent guidelines.
6. Loss of faith in real estate has caused prices to plummet to a point that even excellent homeowners with good credit, jobs and income can not qualify for a refinance as the value of their home does not meet guidelines.

DISCUSSION:
1. Real estate forms the very cornerstone of the average Americans net worth.
2. The average American will not start spending to support the economy when they are worried about their home, its value and their mortgage.
3. Bailing out auto dealers will not make people buy their cars when they don’t know what is going to happen to their home.
4. Investors in real estate are necessary as their home purchases support the many “renters” in America and they also need some type of assistance or the tenants will be out in the street.
5. Nothing in the current Obama plan will stop the decline in the housing market.

SOLUTION:

1. Make the interest everyone pays on their home mortgage a “TAX CREDIT” instead of a tax deduction (immediate income into the hands of all homeowners to allow them to continue paying their mortgage). This could be done for a three year period as an example. This could be capped at $12,000 to $15,000 per mortgage and still be extremely effective. People would immediately have an extra $1000 per month to help pay their mortgage or BUY THINGS TO GET THE ECONOMY GOING AGAIN. Individuals with mortgages would not have to refinance (which they can’t do very well anyway due to the loss of value in their homes which won’t allow them to refi) and they would still get major relief.

2. Make the interest individuals receive on Mortgage Backed Securities “TAX FREE”. This will cause investors to be more inclined to buy mortgage back securities in light of the newer lending guidelines and their increased yield based on valuing their investment as tax free. Part of the real estate problem is the lack of liquidity and the fact that investors are reluctant to buy mortgage backed securities. By giving the investors (401 k’s retirement funds, individuals, etc) the benefit of tax free yields they will buy MBS’s.

3. Make the Capital Gains on homes purchased after January 1, 2010, “ZERO” if held for at least 3 years (this includes all home purchases to include investment property, personal residence’s, second homes, etc). This should spur home buying by individuals and investors and the rate could be reinstated at some year in the future when America stabilizes. One could argue that the Government will lose money on future gains in the market but if something isn’t’ done there will be no gains to tax anyway.

The solutions will cost the Federal government, to some degree, in lost revenue but it will at least put money right down to the individual that needs it the most (the average homeowner still tying to make his payments), restore confidence in real estate as an investment (people will buy mortgage backed securities’ again), and investors will see real estate as a preferred investment due to the capital gains savings.

A crummy $8000 credit for buying a house is about as lame as it gets and will not turn the real estate market around.

If you don’t fix real estate, all other areas of the economy will continue to suffer.

- reinkailua

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