ECONOMY 

THE THREE STEPS:

1.    Buy the underlying real estate from subprime borrowers at current market value on the condition that the lender abandons any deficiency claim. Stated another way, buy the real estate, not the mortgage, and certainly not an interest in the mortgage (the related mortgage backed security or “MBS”),

2.    Rent the properties back to the current owners providing a return of say 5% on the purchase price for a period of time, say three years,

3.    Provide the current owner an option to buy the property back at the end of the rental period for the purchase price, provided rental payments are current. Taxing authorities wave any title transfer fees.

This is a “win / win” solution from the perspective of the economy, real estate markets, taxpayers, financial institutions and the mortgagors. This is a solution in which everyone benefits, and to a much greater extent than the vague explanation that the $700 billion of liquidity support will grease the wheels of commerce. When politicians voted for the existing bill they promised to address the problem of foreclosures, now there is a way. With a few modifications the plan can be implemented within the confines of the existing bill.
 
Based on incomplete publicly released data and assumptions applied thereto, the program would:

1.    Require funding of approximately $900 billion

2.    Create approximately $700 billion of liquidity,

3.    Not cost taxpayers anything provided it stabilized the real estate values at the current prices. In fact, under that scenario, the government would probably make a profit.

Although the funding requirements are greater than the existing $700 billion liquidity bill, this package may supplant other company specific support provided by the government. Further it may be possible to change the relationship between funding and liquidity by altering the priorities between the financial institutions and other investors or convincing or compelling them to leave their portion of the proceeds within the country.

The purchase of real estate from the owners is a better solution than buying mortgage back securities from financial institutions under virtually any scenario. Notwithstanding, the financial simulation models must be updated based on more complete and precise information before these estimates can be relied upon to balance the need for liquidity and support the real estate market. 

Dennis Jewitt has had decades of experiences dealing with insolvent financial institutions and has advised Canada Deposit Insurance Corporation. He also ran the “bad bank” of Royal Trust renamed Gentra.  On July 4, 1995, Diane Francis, editor of The Financial Post, wrote “Gentra is probably the country’s most positive “workout” story and Toronto accountant Dennis Jewitt deserves most of the credit.”