The instant response to virtually every problem that presents itself to modern humanity is that “the government should do something.” While there are certainly areas in which the State provides the best or even the only answer, most people have forgotten that private sector problems are best solved by the private sector, with the State providing assistance by passing and enforcing laws that enable people to solve their own problems.
The best most recent example of a problem that can be solved by the private sector with the enabling assistance of the State is the sub-prime mortgage crisis. The first step, of course, is for the current power elite to recognize that the people closest to the problem are the ones most knowledgeable about the situation and thus are best suited to deal with the problem. They may need the assistance and guidance of the State, but not in any way that makes them even more dependent than they are now.
This is known as the “principle of subsidiarity.” Subsidiarity is one of the most critical features of social justice. Social justice is the type of justice that looks to the common good of the community as a whole – of the institutions within which we carry out civil life – not to the good of the State or of any particular individual.
That being said, a radical overhaul of our mortgage and financing institutions is needed, at least so far as they affect people who are attempting to build equity in their dwellings. Fortunately, there is a free market alternative to a State bailout, and one that benefits the taxpayers instead of burdening them with yet another counter-productive entitlement package.
As a first step, establish a “Community Investment Corporation,” or “CIC.” Each citizen and legal resident will receive a single, non-transferable share in this CIC at no cost. The CIC purchases the land and house at current fair market value, financing the acquisition by discounting a loan at the Federal Reserve Bank. The CIC retains title to the land, but sells the title to the house and the lease to the land to a “Community Housing Corporation,” or “CHC.”
The CHC issues shares reflecting the value of the lease to the land and the title to the house. The CHC gradually hands over the shares to the former owner, now a leaseholder, as the CHC receives enough money as lease payments to pay back the loan from the Federal Reserve through the CIC, which functions as a “development bank.” (This is a transaction known as “sale and leaseback,” which – along with insurance – is what made Warren Buffett so rich.)
When the CHC has received enough cash as lease payments to pay off the loan from the Federal Reserve and released all shares to the tenant (the former owner), the tenant can be given the option to 1) continue as a tenant at a greatly-reduced monthly lease payment (enough to cover taxes and maintenance), and keep the CHC shares – which will pay dividends if the CHC takes in more money than it needs to pay off the loans and meet administrative costs and taxes, or 2) trade the CHC shares for title to the house and the lease to the land, severing all ties with the CHC.
In this way, homeowners or prospective homeowners who cannot meet ordinary mortgage payments or qualify for a loan can, through the payment of rent, build equity not directly in the homes they rent, but in the company that owns the homes they rent. This is a more secure way of home ownership in many ways than the current arrangement. With a traditional 99-year lease on the land, there would be little difference between a leasehold of this type (in which the tenants own the landlord), and a freehold.
By financing this form of home ownership through the Federal Reserve, the taxpayers would not foot the bill, and even (as homeowners through a CHC) make money in the form of equity they build up and any dividends paid by the holding company they own.