Link: The Way Out of the Financial Ditch - New York Times.
To the Editor:
Re “The B Word,” by Paul Krugman (column, March 17):
The national mortgage calamity, often dubbed the subprime crisis, will continue for several years as various iterations of adjustable rate mortgages come of age.
Instead of a bailout as outlined in the column, a solution is required that stabilizes home values involving participation from homeowners, lenders and government.
For the last several months I have discussed such a plan with elected officials, government agencies and investment firms that own mortgages at risk.
“Appreciating America” is a plan I put forward that will help homeowners who need to be refinanced to prevent foreclosure.
This plan involves using a shared appreciation second mortgage to finance the shortfall between the amount owed and the current value of the home.
This is a financial instrument commonly used in commercial real estate transactions, and was recently supported in a speech by Ben S. Bernanke, the Federal Reserve chairman.
After five years, the homeowner and the lender will share in any appreciation of the home, giving all involved a stake in preventing foreclosure and rebuilding property values.
The plan can be adopted by all mortgage servicers, promoted to ailing homeowners and supported by the Federal Housing Administration. It can be carried out immediately.
Let’s not talk about bailouts until we provide bootstraps and solutions.
Nicholas Bratsafolis, Chairman and Chief Executive Refinance.com
New York, March 18, 2008
If there is to be appreciation on a piece of land (remember, houses and other buildings depreciate, at about 1.5% per year. Land may appreciates, if the economy is healthy, population is growing, technology improving, and/or as a result of effective public spending) shouldn't it be the commons that receives that economic benefit, rather than either the individual property holder or the FIRE -- finance, insurance, real estate -- sector of the economy and their shareholders?
Implementing this change is very simple: raise the millage rate on land value.
I think it is the height of chutzpah for the FIRE sector to seek a larger and larger share of the earnings of the American people.
I hope Mr. Bratsafolis will explain to us why the lenders and their shareholders consider themselves entitled to privatize what is rightly the property of the commons. "Rebuilding property values" -- sounds like really muscular work, doesn't it? Sort of like "building home equity." The most passive activity one can imagine! Do you have any idea how little of a mortgage one pays off in the first year? Even in the first 5 years?
Mortgage principle paid off at end of:
Rate 1 year 5 years
4.5% 1.6% 8.8%
5.0% 1.5% 8.2%
5.5% 1.3% 7.5%
6.0% 1.2% 6.9%
6.5% 1.1% 6.4%
And when people refinance regularly, they are living a version of Groundhog Day: They keep having years in which they are paying off 1% to 1.6% of their mortgage -- over, and over, and over! -- and never get to that 5 year point in a mortgage.
Interest as Percent of Payment
Rate 1 year 5 years
4.5% 73% 71%
5.0% 77% 75%
5.5% 80% 78%
6.0% 83% 81%
6.5% 85% 83%
And now the Lenders seek to share in any equity appreciation too?? Chutzpah!
There is a better way. A much better way. Instead of paying the seller for the land and the building, and borrowing 80%, or 90%, or 95%, or 103% of the purchase price -- and subjecting oneself to paying mostly interest to the lender -- and then having to pay sales taxes, and building taxes, and income taxes -- we should raise the land value tax, and use that to collect most of our revenue. Doing so -- following this to its logical extent -- would bring down the selling price of land to nothing. So one would pay a land tax (could be monthly or quarterly) and a mortgage payment on the house itself (to pay off the previous owner of the house for the value of the structure which he, or a previous owner, created) -- and be relieved of other taxes. For most of us, we'd pay a lot less than we are paying now in mortgage, property tax and other taxes. Yes, the land value tax would likely rise with the years ... but it would be low in the years we are raising young children on lower wages, and higher in the years when we might hope to have higher wages due to increased skills. And we'd have a lot more of our income left after mortgage and tax payments. (The ceiling on the land value tax would be about 5% of the current selling price of the land. Most municipalities collect 0.5% to 2% of the value of the total property.)
This was known, 100 years ago, as the Single Tax. It might or might not be sufficient to provide all the revenue that all our taxes provide now, but it would be a far less damaging tax to the economy, and would have a wide range of desirable effects. (They will be the subject of future posts.)
Comments