Co-authored with Jon Greenfield, MD MBA
Some simple solutions need to push economic recovery beyond lower unemployment over the end of the year traditional Holidays. We must look to the longer term needs of all Americans (and people around the world) which is to build the housing market with a focus to develop investment in communities by people in their community. For example, Governor Brown's recent Budget assumes, as Chris Hoene from the California Budget Project (CBP):
"The Governor's budget proposal prioritizes austerity at the expense of helping ensure that all Californians can share in the state's economic recovery."
While CBP does not state what the solutions are, it does note that there is a need to learn lessons from the Great Depression and recent Great Recession so that "Failing to reinvest not only means that many Californians could be left out of our state's economic future, but also puts that future at risk."
Unfortunately the state of California is hopelessly beholding to its conventional thoughts, which are of interest to only the few rich people, now as in the past, primarily those whose profit from personal transportation and the refueling (and recharging) companies that support those markets and the infrastructures that promote them. There is a simple easy way to solve the current economic crises, even with a Republican controlled federal Senate and House influenced by wealthy corporations.
The program could be called "Invest for Made in America."
There is only one product today that is truly made in America. The product is small real estate construction, especially with homes, small commercial and industrial buildings. These construction projects generally use American made products as construction materials and American workers to erect the buildings. More and more today are selecting "green building" standards and codes as well. Hence there is a "rebuilding" of America but now with a focus on just making a profit but also saving the environment, reducing greenhouse gas and emissions through energy conservation, efficiency and renewable on-site power systems.
However there is an excess inventory of houses. This excess inventory of unsold and lender owned property keeps prices down and prevents new housing starts. As long as this continues the economy will not expand. There is no incentive to buy the excess inventory. Yet there are plenty of people that would buy one or more houses as an investment, if they could. Incentivizing the purchase of this excess inventory would absorb current inventory and stimulate new housing starts.
Empowering people to purchase houses as an investment would soak up the excessive inventory. This could be accomplished by temporary changes in the tax code and banking regulations. These changes would cause a rapid stimulation in the economy.
There have been several banking crisis's over the last 15 years. The regulators have used the "two big to fail" doctrine, so have closed small and medium sized banks. Yet these were the banks that traditionally funded small and medium sized construction projects which then lent and to and supported small businesses. There is no infrastructure to resurrect the housing market. There is no incentive to resurrect housing in the United States.
Large banks would rather lend to large corporations, which are themselves are too big to fail which has been another questionable government doctrine. While on the one hand this is a useful approach in restructuring capitalism, it needs another factor, aside from the profits and incentives enjoyed by both the banks and the corporative executives: oversight. What American banks need to do along with lending to big corporations when they are in trouble, is also have a continuing role on the company boards and act as any other investment or finance group would do.
Hence to jump-start the housing and construction part of the American economy the following should be implemented:
1) Existing mortgages collateralized by real estate should be considered performing (for regulatory purposes) if the loan is current. It does not matter what the value of the underlying real estate is. This would incentivize banks to make real estate loans without fear of penalty if the value of the underlying real estate declines. The banks would be protected from fluctuations in the housing market.
2) Extend the deduction for mortgage payments from one house to five houses. Place limits on the value of the real estate.
3) Banks could renew existing real estate loans if they are current without requiring any changes in the terms of the loan. The loan is considered performing if the borrower is current on his payments. This would prevent banks from forcing refinance and financial hardship on the borrower.
4) New real estate loans will be considered performing if they are current. This will continue for the life of the loan plus any renewals of the loan.
5) When refinancing a home loan, the new mortgage payments are deductible up to a loan amount of $1,000,000.
6) The payments on all current and new mortgage payment need to be protected and deductible as long as the original borrower or his progeny own the property.
7) Add incentives if all of the construction workers on any given construction project are US citizens or legal aliens.
8) Set-up a monitoring process for oversite. Add incentives if all of the products used in the construction are made in the US. Incentives could be tax credits to the builder or purchaser.
9) Increase penalties for lying on loan applications. Make forfeiture of the real estate part of the penalty as well as a prohibition on further borrowing in which the Federal Government or any of its branches are involved in guaranteeing the loan. This would include the person on the loan and any person living in the property and who benefited from the proceeds of the loan.
10) To prevent flipping, change tax rules for the proceeds of the sale of real estate. Real estate sold within 3 years of purchase is taxed at ordinary income rates.
The above rules would jump start the housing industry. Currently banks are required to write down performing loans if the value of the underlying real estate declines. They have no incentive to keep the owner in his home. The home is taken by the bank and sold resulting in a glut of homes on the market. Changing the rules would protect financial institutions involved in real estate lending and make it more desirable to do real estate lending.
More people would refinance their homes for remodeling and other purposes freeing capital and allowing it to flow into the economy.
Local and regional governments need to allow people to invest in their local community by buying houses in their area. The houses could be used for family or friends or as rental units. Buying houses near their homes thus, would encourage investment in their community. But also encourage them to be more involved with the entire neighborhood, its development and growth.
More people would purchase homes if they knew that their payments would be state and federal tax deductions and were protected from changes in the tax code.
Local governments issue building permits as well so they need to monitor the communities for both financial and infrastructure reasons. The whole process would be up and running in a few months while ensuring a long period of time for growth and oversite. Hence, real estate prices would rise. Demand for new and existing housing would increase and the housing market would flourish. Finally changing the tax rules would discourage flipping.
America's strength, history and role model for itself and the world, is the unique and concerns of people in the local communities. Innovation, leaders and decisions are made locally. And are the model for the entire nation -- and world. Stand by for some more creative ways to Rebuild America !!!!
(*) Greenfield is a Medical Doctor specializing in orthopedic surgery in Los Angeles. He has a MBA from Pepperdine University and also a valid CPA license from the state of Florida.