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Bringing Self-Help to the Mortgage Mess

The United States Senate recently passed a bipartisan housing bailout plan with a $15 billion price tag. There’s little likelihood the program won’t grow and costs escalate dramatically as the legislation moves through the House Financial Services Committee under the leadership of Rep. Barney Frank, Massachusetts Democrat.

The bloated Senate package essentially absolves irresponsible borrowers and lenders of wrongdoing and, worse still, forces American taxpayers to shoulder the burden of fixing the housing crisis. Its provisions include a $4 billion block grant for communities to purchase and refurbish foreclosed properties, an expansion of the Federal House Administration’s (FHA) loan limit to $550,000 and a $100 million allotment to fund counseling for at-risk homeowners.

Mr. Frank’s plan, which he will soon introduce in the House, would allow FHA to provide $300 billion in new guarantees to refinance these mortgages. And, instead of $4 billion, he wants to give $10 billion in grants to communities for buying and redoing foreclosed homes. Others propose even larger government solutions. Many believe the price to taxpayers will hit $100 billion or more.

The foreclosure problem is hurting American families and our nation’s economy. According to the Mortgage Banker’s Association, 1 in 50 homes with a mortgage is at risk for foreclosure. It is estimated there could be as many as 2 million foreclosures this year. And home prices have fallen steadily and are predicted to continue in a downward trend, dropping 15% in 2008 and 10% in 2009 according to recent estimates.
 
Obviously, America faces a serious economic challenge created by the collapse of the subprime mortgage market. But for a free-market society, costly, big government solutions are arguably worse than the problem. Instead of pouring money on the problem, Congress should look for ways to make it easier for Americans to help themselves.

Homeownership is a key part of the American Dream. And, for most Americans, their home is their single biggest asset.

As such, equity in their home is a central part of their retirement savings. If they were to lose their home, their credit would be severely affected and their financial security irrevocably damaged. A taxpayer-funded government bailout is a bad idea. We should provide Americans with a hand-up, rather than a handout and allow them to use one form of their retirement savings, their retirement savings accounts, to save another form of retirement savings, their home equity.

Thanks to legislation enacted in the 1970s providing tax incentives for retirement savings, millions of Americans have retirement savings plans. According to the most recent Survey of Consumer Finances 44.5% of households with at least one worker participated in a tax-deferred retirement contribution program. As of mid-2007, Americans had accumulated $17.5 trillion in retirement savings plans. In fact, retirement savings account for nearly 40% of our country’s household financial assets.

Accessing these funds prematurely comes with penalties. In light of the current mortgage crisis, we propose temporarily allowing Americans to tap into their retirement plans, without paying penalties or taxes, to make their own mortgage payments, or personal mortgage payments of any other individual.

By enabling borrowers, parents, extended family or friends with retirement accounts to make mortgage payments and allow a family to preserve what is likely its greatest financial asset, we can reduce the number of additional defaults.

Under this proposal, the trustee of the retirement account would be allowed to make payments directly to mortgage companies. Funds could not be used for any other purpose.
Those who choose to expend protected retirement savings in this way would have the option of replacing the withdrawn assets over an extended period. Anyone who chooses not to replace assets pulled from a tax-deferred account would have to pay the taxes due, but not the penalty, by the end of the repayment period. That repayment period would be limited to a fixed number of years, perhaps 12 or 15.

This proposal would reduce the number of mortgage borrowers who are defaulting on their mortgages, shore up the lending market, increase the disposable income of U.S. consumers, and, as a result, help our sagging economy, without additional burden on American taxpayers.

While some may be concerned this proposal endangers retirement savings, they would be mistaken. Many Americans sell their biggest financial asset, their family home, to afford retirement. Allowing them to use retirement savings today to protect that investment for retirement tomorrow strengthens, rather than jeopardizes, retirement planning.

Ours is a free-market response to a serious economic problem facing America. By contrast, the Senate proposal is a government bailout in some instances of people who acted imprudently, in others unethically. Such policy approaches are fundamentally flawed.
We do not believe that hardworking American taxpayers who neither borrowed money they couldn’t repay, nor lent or encouraged people to take out loans they couldn’t afford, should pay to fix this crisis.

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Mr. Morgan is chief executive officer and Chief Investment Officer of Efficient Market Advisors, LLC, which he founded in 2004.

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