On December 16, 2012, Kenneth R. Harney writes in the Los Angeles Times:
Rehabbers and real estate investors rejoice: You’ll still be able to sell houses to first-time buyers using low-down-payment FHA-insured mortgages next year, even if you’ve owned the fixed-up property for less than 90 days.
The Federal Housing Administration has decided to extend its rule permitting loans on quick “flips” of renovated houses beyond the scheduled Decmber 31 expiration deadline. The policy is widely considered one of the key federal government moves that has encouraged private investors in large numbers — often mom-and-pop, small-scale operations — to buy foreclosed and deteriorating houses from lenders, then repair them and resell within short periods of time.
Since the plan was first put into place by the Obama administration in February 2010, more than 65,000 renovated homes have been financed using more than $11 billion in FHA-backed loans, according to federal officials. Roughly 23,000 of these properties were acquired and resold with FHA loans within the last year alone.
Our national economic policy needs to base policy decisions on two-factor binary economics, in which productive capital acquisition takes place through commercially insured capital credit, or a government reinsurance agency (ala the Federal Housing Administration concept). With respect to the FHA’s financial mechanism, following the purchase by an investor, in which case the home is now a capital asset, the primary purchasers of the renovated properties are first-time, moderate-income families who might otherwise be frozen out of the market because they don’t have the down-payment cash required for a conventional loan. FHA down payments can be as low as 3.5 percent. And the mortgage bank providing the loan is insured by the federal government for the face value of the loan should the purchasers fail to pay. What is important to understand is that a home used as a residence is not a productive capital asset and an independent source of income must be tapped to pay for the cost of the mortgage.
In the case of productive capital assets, they are created on the basis that they will generate FUTURE income to their owners. Thus, capital assets are inherently financeable. Using the FHA as a model for capital financing, the promissory note can be offset to the government’s central Federal Reserve Bank in return for the cash equivalent of the amount of the loan, less an administrative fee. The only cost to the direct lending bank in making a loan to corporations would be the administrative fee, or about 2 percent of the loan’s principal and then another 2 percent for capital credit insurance, with an additional quarter of a percent paid to the Federal Reserve Bank to monetize the loan and give the lender the same cash as it would have had if it had actually loaned money to the corporation. The lender’s cash loaned to the corporation is replenished with the Federal Reserve Bank cash. When the company the lender, the lender has to retrieve the note and pay back the Federal Reserve Bank. Thus, the loan cost would be essentially not more than 5 percent to allow ownership broadening financial capital to be invested in corporations to create new capitalists. Thus, national capital credit insurance replaces the requirement for the current corporate owners to pledge security. This concept can be applied to Employee Stock Ownership Plan (ESOP) trusts as well to enable employees of corporations to finance their shared ownership in their companies.
Support the Capital Homestead Act at http://www.cesj.org/homestead/index.htm and http://www.cesj.org/homestead/summary-cha.htm
http://www.latimes.com/business/realestate/la-fi-harney-20121216,0,7259629.story
