A Main Street solution
Orson Aguilar | 10/1/2008, 5 p.m.
Letter to Secretary Henry Paulson, U.S. Department of the Treasury, Chairman Ben Barnanke, Federal Reserve; Chairman Sheila Bair, FDIC; and John Dugan, Comptroller of the Currency.
The proposed $700 billion dollar bailout has limited support from Main St. and appears to lack effective bi-partisan support. Whether or not this bailout is resurrected, we would like to offer you a Main St. proposal that is not in conflict with the proposed bailout and will ensure that Main St. homeowners benefit.
Sovereign wealth funds from China, the Middle East and European nations, such as Norway, could provide an alternative home lending investment pool that could help stabilize home prices and eventually create a market for three or more million homeowners (sovereign wealth funds have an estimated $3.5 trillion in funds.)
This Main St. proposal, if embraced by you, could generate bi-partisan support, would be far less costly than the proposed bailout, and will clearly and directly benefit homeowners rather than Wall St.
The U.S. Treasury, with the support of other banking regulators, could create twenty to eighty separate Sovereign Wealth Fund Home Lending investment pools of $5 billion dollars each. The purpose would be to invest in thirty year 6% fixed rate mortgages for homes up to 100% of median regional prices. It would be limited to homeowners with incomes that are up to 100% of median regional income.
The loans would be partly guaranteed by the Treasury. For example, seventy-five percent guaranteed for all qualifying loans; and, as an incentive to lend to low-income families, the guarantee could be up to ninety percent.
There is little or no risk since the foreclosure rate for thirty year conventional fixed rates is at one percent or below for low income families where income has been verified and the appraisal value has not been inflated.
The incentive for sovereign wealth funds would be a rate of return that could be fifty percent more than that presently available for ten year Treasury notes whose interest rate is below four percent.
Two hundred billion dollars would provide sufficient funding to create 1.2 million mortgages, or enough to help stabilize home prices. (Our calculation is based upon the present median national home price of $203,000 with ten percent down. Every $5 billion would provide approximately 30,000 home mortgages.)
Given that China alone has $1 trillion dollars invested in U.S. Treasury notes, and that there is $3.5 trillion in sovereign wealth funds, from twenty-one nations, we believe this innovative program could be quite successful if regulated by Treasury and/or the federal banking regulators.
FDIC and Buffet Supervision Would Inspire Confidence
To ensure both Main St. and foreign investor confidence, we would suggest that Sheila Bair, the chair of the FDIC, be designated by the President and Treasury to head this effort. In addition, given the widespread confidence in Warren Buffet's investment approach, we would urge that he be recruited to serve as Chairman of the effort.
It is quite possible, that with the leadership of Sheila Bair and Warren Buffet, and the present unstable market conditions, that this $200 billion sovereign wealth fund offering could be oversubscribed. Congress could then consider extending this program for up to $1 trillion dollars which would be more than sufficient to address homeowner demand, foreclosures, and stabilization of home values and neighborhoods. This approach would also lessen reliance on Fannie Mae/Freddie Mac as the almost exclusive backer of affordable homeownership.
Once interest is demonstrated by the Treasury and the regulators, Greenlining's experts will be happy to meet with your senior staff to discuss other details. (Please note, we have confirmed meetings with the heads of all the federal banking regulators on November 17th and 18th).
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