This is the Household Initiative Plan

Here's a new plan for America's housing problem called the Household Initiative Plan. It’s called that because of all the plans out there it is the only one that asks little of the Treasury, Federal Reserve, or other government agencies besides non-interference in what millions of responsible householders could do for themselves on their own initiative.

My Household Initiative Plan will act to revive the real estate market by attacking three parts of the problem together. It reduces the unsold housing inventory and arrests the decline in home prices by helping liquidity re-form in the real estate market. It does this by making available an untapped source of capital that has previously been hard to access: the IRAs, SEPs, SIMPLE and Keogh plans of American retirement savers. According to the Investment Company Institute, there were over 46 million of these retirement accounts at the most recent survey in 2007, holding an incredible $4.5 trillion. No doubt some has gone in the financial market collapse, but it is still a great deal of money even by current jaded standards.

While it has been possible to buy real estate with IRA funds all along, the heavy restrictions and complicated regulations have kept people from doing so. This plan calls for suspending the restrictions and regulations on the use of IRAs for real estate purchase.

At present, if you buy property through your IRA, you do not own the property, the IRA does. You cannot pay the taxes and maintenance expenses of the property, the IRA has to have enough funds to cover them. You cannot make personal use of the property while the IRA owns it, it must be held only for investment until distribution upon your retirement. You cannot manage the property, the IRA trustee has to designate a manager. You cannot collect rents, they have to be paid to the IRA. You can apply monies from more than one IRA account to the purchase and expenses, but in effect you cannot buy the property with a mortgage simply because no lender is going to have IRA accounts as mortgagors.

At least for the duration of the economic crisis, why not liberalize and simplify the system, so that more people might take advantage of low real estate prices using IRA money that they have but would not think to use for this purpose? Let's allow people to take as much of their money as they want out of IRAs, SEPs, SIMPLE and Keogh plans, without taxes or penalties, for any real estate purchase – investment property or principal residence, first, second, or seventh home. They can then write contracts and take title as real persons in the regular way, without the complication of having a trustee execute these instruments on behalf of the IRA. Subject to market conditions and substantial down-payments, buyers should be able to get mortgages for regular-way purchases.

Let's permit buyers using IRA funds to pay property taxes and maintenance expenses and collect any rents of the property either personally if they prefer, or through the IRA if they can. On an investment property, if they receive net investment income personally, it can be taxable, if through the IRA, then not. That will provide an incentive for directing investment income back to the retirement accounts. If the property is used as the principal personal residence of the owners, the normal mortgage interest deduction can apply. If it is a vacation home, then perhaps disallow that, because there has already been a tax advantage conferred by the liberalized use of the IRA monies.

If a property paid for with IRA funds is sold before the owners' retirement, there are at least two sensible ways of handling the net proceeds. They can either go into another property without any capital gains tax but also without the further complication of a Section 1031 Exchange. Or the proceeds can return to the IRA, without fees, taxes, or penalties. Also – and this is important – if the account holders suspended IRA contributions after their property purchase, they should be permitted to catch up on their contributions and top up their accounts to the full extent that they could have funded their accounts under IRA rules.

The idea of my Household Initiative Plan is to make things easy for people to choose to use their IRA assets to buy real estate now. It removes the preference for financial assets over real assets and places both on a level playing field. Financial experts will object that retirement-minded investors should prefer stocks at today's low prices. However, real estate is also very cheap now, particularly in popular retirement regions of the southwest and southeast, and there is no way of knowing whether houses or stocks will treat people's money better in the coming years. As they always say, past performance is not an indicator of future results, but it is noteworthy that even after its sharp decline, the broad real estate asset class has performed better than the S&P500 over the last ten years.

The key point at this time of financial uncertainty is this: The people's money in IRA accounts belongs to them, and it should be their free choice to do with as they think best. If their choice can help the national prosperity as they prosper themselves, and at no additional public expense, what could be better for the general welfare?






D.H. Smith, Mt. Freedom, 2/16/2009
your feedback eagerly sought
cross-posted at The Grayling blog, www.the-grayling.com
Copyright (c) 2009 by D. H. Smith. All Rights Reserved. "

[my regular postings are at The Grayling blog]

Notes on the HIP

1. The careful reading and valuable insights of Harriet Baldwin, Charles Burns, Timothy Gildner, Cameron Adams, Swee Hsien Tsung and Terry Zou are gratefully acknowledged.


2. Other plans to fix the housing market focus variously on one or more parts of the problem: they aim to shore up the capital of banks, re-constitute the mortgage markets with private or government investment, re-work loan terms to mitigate foreclosures and keep people in their houses, clear the market oversupply of houses, and stop the spiral of house price declines. No single plan acts upon all of parts of the problem. Most act upon more than just one part. No useful plan acts upon only one.

3. The following are the key points of the well-known real estate plans, no doubt digested to the point that their originators would not recognize them:

a) The Zingales Plan (Luigi Zingales, of the University of Chicago) -- A decline in an index of local property prices triggers a government-mandated reduction of principal balance on securitized mortgages; lenders thus crammed-down may recapture some of future price appreciation in underlying assets.

b) The Columbia Plan (Glenn Hubbard and Chris Mayer, Columbia Business School) -- Calls for nationalized institutions Fannie Mae and Freddie Mac to provide home loans to new and existing borrowers with positive equity on such terms as would be available were markets working normally e.g 4.75% for 30 year loans.

c) The Feldstein Plan (Martin Feldstein, Harvard) -- Proposes “mortgage-replacement” loans from the treasury at low cost (e.g. 2%) for all mortgage holders, up to 20% of their outstanding mortgage debt, to reduce their cost of debt service. These loans are full recourse, in first place ahead of mortgage, and aim to reduce the incentive for owners to abandon their properties.

d) The Immigration Plan suggests allowing an increased flow of immigrants to take up the excess housing stock.

e) The National Association of Realtors Plan: Expand and extend the home purchase tax credit, increase conforming loan limits, use TARP funds for mortgage interest buy-downs, and keep banks out of Realtors’ traditional business.

f) The National Association of Home Builders Plan: Extend tax credits of 10% of purchase price up to $22k to all new home buyers, and use TARP funds to buy down interest on conforming mortgages.

g) The Fix Housing First Plan (Sen. Johnny Isakson, Republican of Georgia, et. al.) -- Extend tax credits as per the NAHB plan, applicable to 2008 income tax, and make them monetizable, so that buyers can apply them at closing.

h) The Stimulus Plan as signed on 2/17/09 -- Expanded a program of $8000 tax credit for first-time homebuyers only, repayment not required.

4. Most of the well-known real estate plans have their good points, but the one thing none of them do is provide for the American people to exercise free choice to apply their own existing resources in the service of their own economic interests.

[my regular postings are at The Grayling blog]

Some Reaction to the HIP

I ran the Household Initiative Plan by the strong free market advocates of the Ayn Rand "Atlas Shrugged" group on Linkedin, and got back strong opinions. One comment:

“The defect [of the HIP] is that it's just minor tinkering. Instead, let's repeal the community investment act, privatize or abolish the GSEs. Repeal the income tax, lay off all government employees . . . this plan is illogical since it seeks to artificially make real estate go back up again . . . "

Another:

"The defect [of the HIP] is that is a plan and a planned economy never works. You describe it as a plan to turn the housing market around. Around from what and in which direction? I don’t know if real estate has to come down [and] neither do you . . . the only way to know what should happen is to free the market and watch it work."

I answered as follows. First, there is no way that liberating 46 million accounts and trillions of dollars constitutes minor tinkering.

Second, I think my use of the word “plan” has caused more grief than the actual contents of the plan. Among strong free market believers it is a word that elicits negative reactions. I only chose the word plan in order to try to compete for attention among all the other plans that are out there -- Zingales, Hubbard/Mayer, Feldstein and all the rest. I could have called it a proposal, an idea, or following an ancient Fed official, a banana.

My plan, or banana if you object to the word plan, is non-interference, a level playing field, clearing away the regulatory debris, and letting the owners of capital decide how to apply their capital.

The "planned economy" is not part of my proposal. On the contrary the "planned economy" was introduced to this situation years ago when the current structures of IRAs, Keoghs, SEPs Simples and all the IRS apparatus that goes with them were created. By the way, it should be understood by one and all that this whole apparatus was a giant gift for investment companies, banks, financial planners and accountants.

Surely I am not the only one with money in IRAs, losing money in financial assets and thinking about the future, who might choose to buy a condo in Florida instead with the money if the restrictions were lifted. That would be my choice, freely made, well considered, possibly wrong, but I'm willing to take the risk on that if I am permitted and not ask for a bailout if I am wrong. If someone else chooses to stick with their Fidelity and Putnam funds, I would be the last to tell them they can't.

At least for now, the money in these accounts belongs to the people who own the accounts. (There are professors at the New School who are advising the administration to do something about that too.) Let the people make their own choices. I don't see how that can be objectionable.

[my regular postings are at The Grayling blog]

Still More Reaction to the HIP

I got a valuable contribution from my best college friend. He writes:


Dave,

. . . First, the biggest problem is selling the idea. It sounds good, but who in the government is going to buy it? Democrats don't trust that people are smart enough to be able to handle their own retirement accounts - isn't that the purpose of Social Security? The cushion that an IRA, et. al., offers is still a piece that is supposedly handled by people that have some idea as to what they're doing - not Joe Bag O'Donuts next door. Republicans don't think that people with small investments are worth supporting in this measure, as they get their support from those money managers who are handling all the IRAs. You're going to take away their revenue stream.

Second, it seems that more people have problems with their existing mortgages. Emptying out their IRAs will have already occurred in some cases, in an attempt to stave off that foreclosure. Others will have to figure out how to draw out that IRA to buy fresh real estate while still being upside down on their existing mortgage. How do you handling buying a $300k home, with your $250k IRA when you already owe $250k on a house now valued at $200k? Insert whatever relevant numbers you want here, the problem is still the same.

Third, how do you convince people that investing in real estate is a good idea. [My city] ranks third among emptying cities. There's a glut of available real estate, and the prices continue to drop, but even those people with money are refusing to part with it - at least not for tickets that pricey. It's the same reason car sales have dropped. You can survive in a house with drafty windows and too small rooms, while you wait for the recovery. You can milk another 20 thousand miles out of that car, squirreling away the finally-relieved car payments, rather than upgrade, just to make sure that HP doesn't decide to downsize your department.

All that being said, I do think that your idea seems worthwhile. The problem has always been what the Dutch discovered hundreds of years ago - it's all just a bunch of tulips. Speculation leads to false value leads to soaring investment, finally to gossamer worth. When you discover all it ever was is a flower, then it all falls down on itself. Real estate has a quantifiable value. While it may not always be monetary, it is always concrete in its being. (Picture bad pun here.)

Hope that helps.



I replied as follows:


Hey there, I really appreciate you looking at it and giving me this well-considered feedback.

I'm a strong free market guy, so my best hope of sponsorship is not in either of the parties as you say, but in think tanks like Cato, Hudson, AEI. If they get behind something like it, the Republicans may pick it up in their role as opposition.

There is nothing for Republicans from Wall Street anymore, and no risk in attacking the franchise of the investment companies, banks and financial advisors.

You allude to a major problem that bothers me too: the fact that people are struggling when they have money that could help them, or are being subjected to penalties when they go into that money. I think it would be best to get rid of these penalties for the duration of the crisis. (Or forever.)

The candidates for buying condos in Florida and Phoenix are not the people who are upside down in their principal residence. They are the ones who could take $75k out of their accounts and finance $25-50k . . . in other words, buyers who would buy with a low loan-to-value ratio, if not a zero LTV.

I would be the last guy to try to convince anybody that they should do this or that with their money. Some people would make this choice freely if it were open to them. I sure would. That said, I believe the loss of confidence in financial assets will last for many years, while there is some baseline real-life demand for real estate. As you say, it is concrete and you can live in it.

If governments gets things wrong now and print money to paper over the cracks in the system, we will get to where you need bushel baskets of dollar bills to buy a Big Mac. The gold price is telling you there is real concern about this outcome. Real estate prices are indexed for inflation, but financial asset prices generally are not.

[my regular postings are at The Grayling blog]

Press the Administration on Retirement Accounts

There is a lively discussion under way at the Legal Insurrection blog with a post "The Revolt of the Kulaks Has Begun." In the comments it is suggested that the administration will come after tax-advantaged savings assets of American retirement savers.

This is dynamite. It is hard to believe the administration would overreach this way, but congressional Democrats exposed them to the charge by taking advice from Teresa Ghilarducci, a critic of the retirement savings system at the New School. In effect she suggests confiscating private accounts and supplying guaranteed government accounts in their place.

Promoting my Household Initiative Plan or something like it is one way to make the administration tell us what it really has in mind for private retirement accounts.

I have been making free-market proposals to liberalize the current rules for the 46 million IRAs, SEPs, SIMPLE and Keogh retirement accounts and permit them to invest in real estate without the heavy restrictions which pertain to them now. Retirement-minded people who are in good shape, not behind on their bills, and not struggling, could benefit from this opportunity to use retirement savings to take advantage of low real estate prices in popular retirement areas.

If you believe that the money people have contributed to their retirement accounts belongs to them, then it should be their free choice to do with as they think best, to take advantage of such opportunities as they perceive, or to bail themselves out of the trouble they are in. And if the administration thinks differently, then it would have to knock down proposals like my HIP.

Let's speak more generally about the restrictions and penalties that apply to these accounts. They are making a terrible situation even worse by restricting liquidity. Many people are being severely penalized for tapping their retirement accounts in order to try to save their homes and credit scores. Others who are behind on their mortgages and other bills, thereby damaging their credit, are nevertheless unwilling to incur the penalties they would pay to access their money in these accounts to get current on their bills. This is just madness. For the duration of the crisis, let's free things up, and let people access their own money in these accounts to work themselves out of trouble without penalties.

Let's Talk Defaults

And let's dispose of a piece of received wisdom that is abroad in the land, and totally wrong.

Jamie Dimon of JP Morgan had the opportunity to hit this out of the park the other day when someone asked him about whether borrowers who are underwater on their loans might as well just walk away. Predictably enough, he said no, a mortgage is a contract and when you make a contract you should fulfill its terms.

True, and a large part of the moral truth. But not the whole truth, as there is a practical truth as well, for those who are not bound by moral scruple, who ask not "What's right?", but "What's in this for me?" The practical truth is that walking away has dire consequences that people have to weigh together with other considerations.

If you walk away, and the lender forecloses, it will destroy your credit for eight or ten years. If things improve and you want to buy a house again, or you need a car, a credit card, a student loan for your kids, you will be hard pressed to get one with a foreclosure in your recent past.

Moreover when the sheriff auctions your foreclosed house on the courthouse steps, there could well be a deficiency judgment against you for the difference between the hammer price and the amount on which you have defaulted. That deficiency judgment could follow you around for twenty years, during which the court can garnish your wages, withhold your tax refunds, and sell whatever assets you have that they can attach.

A ten- to twenty-year sentence? It is not worth it. You are far better off, and your lender is far better off, working it out than mailing the keys back to the lender and running off.