Homeowners and small business owners are in deep trouble as a result of the recession and need help fast. Homeowners have been and will continue to be jolted by the falling value of their homes, the loss of family incomes, and high debt. This has translated into less consumer purchasing which directly affects small businesses.
Small businesses have been jolted by falling demand, an uncertain and weakened business climate as well as very restricted access to credit. Home ownership is the backbone of the American family, a core of American wealth, while small businesses are crucial to job creation and economic stability. Both need help now! We propose a breather for each that won't raise taxes, won't enlarge the national debt, will stimulate middle class lending and, with little doubt, will restore morale and create jobs immediately.
To good to be true? We are four non-political professionals in finance, economics, and law who have studied the problems of the recession that continues as well as the slow, costly stimulus packages favored by Washington. Here are our proposals for creating new jobs and ending the recession.
First, we propose a "bottom up" plan, gMAP, to slow residential foreclosures by granting very low interest loans to all primary homeowners earning less than $250K/year. These loans will be used only to pay their mortgages and cover all or most of the monthly payments for a period of time from 12-15 months....a breather if you will. Unlike the existing Home Ownership Retention program that requires borrowers to have proven income, our program will also benefit those who have lost their jobs or a significant portion of their income. This is how it works:
The federal government will issue guarantees through a Clearing House, which will contract with local lenders to accept the guarantees from the federal government in exchange for an equity position in the lender. The lender will assume the obligation to make a new loan to primary homeowners (without disturbing the existing mortgage) and agree to fund the new loan for the benefit of the existing primary homeowners, solely as payment of his or her existing mortgage each month, thus giving the homeowner a "breather" for a year or more. These loans will cost the homeowner 0.5 percent and be repayable in ten years or sooner upon a sale or refinancing of the home.
This gMAP plan is designed: 1) to get some relief immediately to homeowners and to restore or maintain these mortgages as current on the books of lenders; 2) to treat the guarantees taken by the lenders as consideration for an equity in the lender which will be owned by the federal government; 3) to increase the lenders' equity and thus the reserves on the balance sheet of the lender so the lender, who makes little on the guaranteed loan to the homeowner, but can then, with these new reserves, make 10 or more times more revenue by originating new loans at market rates to new homeowners and thereby, 4) to stimulate home mortgage lending immediately where it does not now exist. These gMAP loans should be secured by the existing mortgage (as a future advance) or by new mortgages and will, of course, be secured by the guarantees.
We understand that there will be a need to modify some mortgages and that REMIC loans will require some legislation to permit the new loans, but this is possible.
A similar plan, gBIZ ("Guaranteed Business in America") will assist small businesses. The federal government will provide, through the Clearing House, guarantees for new loans for businesses with annual sales under twenty million dollars ($20 MM) and in business for at least 3 years. These loans will be funded by the lender, which assumes the guarantee in exchange for equity in the lender, again creating new reserves and increased lending ability for the lender. Lenders can be required or strongly urged to make new market rate loans.
The government should rarely have to fund the guarantees as it will do so only when the home or business doesn't recover sufficient value over the 10 years to permit a sale or refinancing sufficient to repay the gMAP and gBIZ loans. Fewer homeowners and businesses should default given the job stimulus that will result from the additional money in the hands of homeowners and small owners as a result of these Plans.
Reasonable lending rules would be required to address any avenues for fraud or where the loans should not be made, but, generally, the loans should not have to be in default or in jeopardy to qualify, i.e. strong borrowers should participate since they will be more likely be the owners of small businesses needed to create jobs and demand, thus strengthening all small business and spurring hiring and demand. Most important, the downward spiral that feeds recessions would then be broken. This approach could cure many social and economic problems in a non-political and bipartisan way.
We have considered whether the government should be permitted to sell its equity at the end of the life of the guaranty as additional security to the government. This would allow the government to recoup any losses and reinforce the plan that would be revenue neutral and not increase the national debt. The alternative would be to give the lender the first right to repurchase the equity held by the federal government at original cost plus interest. There could be rewards for lenders that made good loans that were repaid without reliance on the guarantees.
We believe that these financial recovery plans of gMAP and gBIZ can be revenue neutral, fast, effective and non-political.