By allowing securitization of NINJA loans, and other "sub-prime" mortgage products the US Federal Reserve Bank has injected a perhaps lethal dose of poison into the circulatory system of the international financial system.
It may be that changing real estate finance from a "deficit basis" to an "asset basis" would provide a path forward. But the primary problem remains how to police the system, (perhaps Greenspan thought the invisible hand would perform that function), and how to prevent gross abuses during the transition between systems, as in Russia during the '90s. Should the current financial problems be as serious as some fear, it is unlikely there will be much time to work out details.
A significant amount of wealth is in the form of unmortgaged property, CDs and money market funds belonging to retirees. How could this proposed system mediate between the interests of this population and the needs of the larger economy. I would bet that a large portion of this population would think that a 5% return, combined with genuine security insulated against currency risk would be an acceptable bargain. This population also has a high propensity to vote.
If sanity be culturally normative, then by the norms of this culture I claim insanity.
I would bet that a large portion of this population would think that a 5% return, combined with genuine security insulated against currency risk would be an acceptable bargain.
That 5% return is before inflation. The "Affordable Rentals" which form the basis of the new form of "Equity" I advocate would be index-linked, and therefore the rate would be less, maybe 2 to 3% pa.
Moreover one of the most interesting features of the model is that it is superior to either of the two principal "Equity Release" mechanisms:
(a) "Reversion" - where someone pays an Equity Share in your house and gambles on how long you live - so if you are 85 you get more than if you are 65;
(b) "Roll Up" mortgages - where interest is not paid, but "rolls up" at a pretty high rate.
A home owner simply sells "Equity Shares" to investors and pays a "Capital Rental" in respect of them either in cash - thereby maintaining his level of Equity - or in more Equity Shares.
This mechanism runs down Equity more slowly than any other.
