Home Loan Programs for People with Bad or no Credit

The home mortgage crisis has caused a virtual tsunami of home foreclosures, as well as spread panic in the public sphere as the number of homes with mortgages that now qualify as “troubled” tops twelve percent of all outstanding mortgages. The question is what to do about the situation as the number of people with bad or no credit increases dramatically in the United States and other economies. What is needed is a program based not on political motivations or charity that will assist people who otherwise would not qualify for a mortgage to become homeowners.

There is a feasible solution. Instead of putting additional burdens on the taxpayer and potentially debauching the U.S. dollar further, the State should confine its role to providing enabling reform legislation, and to policing abuses of the system if and when they occur. Let private citizens organize into “Homeowners’ Equity Corporations,” or “HECs,” and let the free market operate properly to solve the problem instead of trying to force the tax system to be anything other than a way for government to raise money to meet its legitimate expenses.

A HEC is a proposed for-profit, professionally-managed stock corporation whose shareholders would be homeowners in danger of foreclosure. HECs – and there should be many, to provide redundancy, lower risk, and ensure competition in a community – would purchase distressed properties at their current market values.

HECs – like leveraged ESOPs or “Employee Stock Ownership Plans” – would obtain acquisition loans from commercial banks. The commercial banks would, in turn, discount the loans at the local Federal Reserve under Section 13 of the Federal Reserve Act at a rate reflecting transaction costs and a revised risk premium. The homes thus acquired by the HECs could then be leased at a realistic market rate to their former owners or new tenants.

The tenant would earn shares in the HEC as lease payments were made sufficient to cover debt service, maintenance, and taxes. When the acquisition loan for a particular property was fully paid, the tenant could exchange his or her HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover maintenance and property taxes. Financing the purchase of properties through the Federal Reserve System and its member banks would cost the taxpayer nothing and be the first step in restoring a currency backed by hard assets instead of government debt.

This innovative alternative to the current system of mortgage lending to individual buyers (who assume all the risk instead of joining with others to spread the risk) may require some enabling legislation from Congress to give it powers similar to those currently enjoyed by leveraged ESOPs. After that, the State can step aside, except for its regulatory role, and let people solve their own problems without imposing any more burdens on the taxpayer.