Buyout scheme worth try
Diane Francis, Financial Post Published: Saturday, October 11, 2008
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Washington should undertake a massive, temporary buyout of residential real estate in order to save its economy from years of turmoil and credit crisis, said an expert who helped bail out Canada from similar turmoil in the 1980s and early 1990s.
Canadian workout and insolvency expert, Dennis Jewitt, who ran workout giant Gentra, undertook a miraculous turnaround in the 1980s involving trust companies, banks and real estate collapses in Canada. In a telephone interview yesterday, he proposed the same fix for the United States.
His scheme would break the vicious cycle that's destroying everything: lousy mortgages, 176,000 foreclosures a month (which lowers every-one's property values) and frightening writedowns (which tighten credit for everyone as the banks foreclose).
There is also no subsidy involved; people can remain in their homes for half the cost of owning them, then eventually buy them back if they choose in a couple of years.
Here's how Jewitt's scheme would work today:
-The government should offer to buy out anybody with a subprime mortgage at the local discounted property value.
-The government should say, "Take it or leave it. You can't afford your house, so we'll buy the house and pay off the mortgage and rent it back to you."
-The mortgage holder must waive what's called a "deficiency claim," which would allow it to go after people for the losses the mortgage holder would incur. Any bank that refused to do so would not have its property bought.
-Here's the magic: A subprime mortgage at 8% on $300,000 would cost $24,000 a year in mortgage payments. If the government buys it for $240,000 and charges the former owner 5% of $240,000 as rent, or $12,000 a year, the government will net a tidy profit because it borrows money at less than 1%.
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Originally Posted by Muz
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