Monday, August 1, 2011

Equity Insurance: The Way out of the Housing Crisis?

For the last few years, people have been searching for ways to fix the U.S.’s major economic problems. In a recent article in the Wilmington News Journal, Delaware’s former chief deputy attorney general Charles Brandt proposes a new plan to reinvigorate the struggling housing market.

The housing crisis began when large numbers of buyers defaulted on their loans, which led to banks foreclosing and the market filling with cheap houses. The prices kept falling, so no one wanted to risk buying a house if the price might immediately drop again.  Lack of consumer confidence became a major issue. Brandt’s idea for a solution is the creation of Government Equity Insurance to encourage qualified buyers to purchase new homes. This program would need to be run by the government, either implemented by Congress or any state legislature, since these days private equity insurance doesn’t inspire as much consumer confidence after recent failures like AIG. Brandt likens GEI to the FDIC, which allows bank depositors to feel confident that their money is safe.

Under this plan, houses would still be appraised for fair market value at the time of purchase, and the buyer would pay that amount and own the house for five years. Then for the next twenty years, the buyer would receive a tax credit or refund to cover the difference in price if he sells the house for a lower fair market value than what he originally paid for it, minus the estimated cost of any necessary repairs. The program would be a temporary measure, probably lasting for no more than two years, though it could easily be extended or even repealed after a year if for some reason it doesn’t work out.

As Brandt sees it, GEI is a win-win program. Eventually, home prices will go up as demand matches supply, employment will rise, and the states that provide GEI will benefit if homebuyers from nearby states decide to take advantage of the insurance and move there. And as Brandt says, the most important factor is that “no GEI policy will ever have to pay out one thin dime in claims, because GEI's existence will put wind in the sails of the housing market.”

Charles Brandt is the author of I Heard You Paint Houses (Steerforth Press), which is set to be made into a Martin Scorsese movie starring Robert DeNiro.

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