New Housing Bailout - The Osman Plan

by Osman Parvez
A few weeks ago, my parents were visiting from upstate New York. At some point, we had an intense discussion about bailout and economic stimulus efforts. I argued that enormous amounts of liquidity were being "injected" into the financial system by central banks, but it wasn't addressing a fundamental problem. Housing was still way too high in the former bubble markets and yet prices were continuing to collapse.

My idea was simple. Use the GSE's (Fannie, Freddy) to underwrite new low, fixed rate mortgages to highly qualified buyers in select zip codes. My recently built investor model (soon to be discussed on the blog) showed that return was very sensitive to mortgage rates. A low fixed rate (say 3%) would put a floor under the housing market in the worst hit areas. Investors (with high credit ratings, strong incomes, and a prudent amount of equity) could swoop in and convert these homes back into rentals. Because it would be selectively applied and temporary, it wouldn't re-inflate a bubble but it could stop the free fall in prices. The government could even layer in tax incentives, like accelerated depreciation and temporary tax credits.

My father, eventually agreed that it sounded like a good idea. Then he asked, "What are you going to do about it?" He suggested at least submitting it to the incoming Obama administration.

At first I was reluctant, but with "yes we can" in mind and spirit, I did. And what do ya know? A few months later, voila!

According to the WSJ, the Treasury Department is considering a new plan.
The plan, which is in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full point lower than prevailing rates for standard 30-year fixed-rate mortgages.

Government officials are under pressure to address falling home prices and mounting foreclosures, which underpin the financial crisis. The Treasury has struggled for months to come up with a plan that would ease the strains on borrowers without appearing to bail out homeowners and lenders.
The devil is in the details but I think this plan could actually work. Yes, yes... I know my submitted idea is probably sitting in a digital vault among million of unread suggestions for President-elect Obama, but I like to think that somebody read it and realized its brilliance. I might even have to call it the Osman Plan.

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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

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This document contains forward-looking statements. You are strongly cautioned that investment results are subject to business, economic and other uncertainties. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time. Always consult your financial advisor before making an investment decision.