How to Keep Americans in Their Homes

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.

Here's is a scheme I wrote about in the Financial Post that would break the vicious cycle that's destroying everything: lousy mortgages, 176,000 foreclosures a month which lowers everyone's property values, frightening write downs which tighten credit for everyone as the banks foreclose.

Workout and insolvency expert Dennis Jewitt pulled off an impressive turnaround in the 1980s involving trust companies, banks and real estate collapses in Canada. He proposes the same fix for the United States and said that the McCain notion of buying mortgages is not the route to go.

"McCain proposes that the government buy the bad mortgages from the financial institutions at their full face amount as opposed to their current market value and transfer that loss into the taxpayers. Next he would negotiate more favorable terms so people can afford their mortgage payments. Under this approach every mortgage would have to be renegotiated and the administration staff will never be able to keep up," Jewitt said to me in an interview with the Financial Post. "The best solution is for the government to buy the real estate not the mortgages."

Here's his scheme:
  1. Washington should offer to buy out anybody with a sub-prime mortgage at the local discounted property value.
  2. 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."
  3. 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.
  4. Here's the magic: A sub-prime mortgage at 8% on $300,000 would cost $24,000 a year in mortgage payments. If the government buys it for $240,000, 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%.
  5. Once prices return, tenants can buy them back if wish at the same discounted price the government paid for them.

The big fix is not a subsidy.
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 to in a couple of years' time.

The government makes money because it can borrow cheaper than banks or anyone else can.

The prices of homes nearby will benefit because foreclosed properties sit empty and drive down all values. Once prices return, the tenant can buy the back if he or she can or wants to do so at the price the government purchased it at.

A Public Housing Workout Corporation should be created to stop the downward spiral and looming bank writedown problems as foreclosures mount. "You have to have enough capital so you can hold these properties and improve them. The last thing the market needs is a fire sale."

In essence, the Jewitt proposal temporarily replaces the commercial banking middlemen, struggling to survive and choking everyone else, with the government. "There were 176,000 foreclosures in July, houses sitting vacant up for sale, and depressing the market value of every house in the area, This idea will keep the properties off the market by renting them to the people that owned them at a rent that's affordable."

For more information about Jewitt's scheme, he can be contacted here. He should be hired to put together a team by the current regime or the next one.

testPromoTitleReplace testPromoDekReplace Join HuffPost Today! No thanks.