The U.S. public is outraged at the $165 million in bonuses paid to employees of insurance giant American International Group after AIG received billions in government bailout fundsand Washington is looking for ways to make bonus recipients pay back the money.
But what about bailed-out homeowners? Shouldnt they also pay back money they receive from taxpayers?
The government can provide stressed homeowners the help they needand recover much of the costsimply by taxing most of the capital gains that bailout recipients realize on home sales until the value of the assistance is fully paid back to lenders and taxpayers.
Lets be clear: The administrations plan to help homeowners avoid foreclosure is a giveaway to those homeowners.
And a restitution policy would have many benefits besides reducing the burden on taxpayers and lenders and providing economic incentives for future homeowners to avoid similar mistakes.
For one, it would help reduce the participation of speculators in the bailout plan; for another, it would also discourage the participation of homeowners who dont really need a bailout but are willing to take a giveaway when government offers one.
The key is to make the repayment contingent on future capital gains.
The proposed Obama plan would lower the monthly payments paid by targeted homeowners, possibly dropping interest rates to as low as 2 percent for a minimum of five years. The reduced monthly payments would be absorbed largely by the lenders, with government pitching in so lenders dont bear the entire burden.
I would enhance the administration plan by including explicit provisions requiring homeowners who earn a profit on the future sale of their homes to pay back the government assistance.
Specifically, I propose that bailed-out homeowners, for the rest of their lives, give up 80 percent of future capital gains from the sale of their homes until the government gift is paid back. They would be required to pay back only 80 percent of each capital gain to give them an incentive to keep their homes in good shape and sell them at the highest price.
Homeowners currently struggling to keep their homes shouldnt mind giving up 80 percent of something in the future that they were not expecting to get anyway. Even if they do mind, the repayment wouldnt interfere with their current ability to make the modified mortgage payments and they should neither expect something for nothing nor be given such an offer.
The enhancement I propose is equivalent to the government taking an equity position in the future capital gains in housing for these homeowners.
A mechanism is already in place to keep track of the paperwork, since the IRS already keeps track of capital gains on homes. For homeowners in the program, the capital gains tax rate would be 80 percent and would be independent of any other tax obligations or deductions until the full gift amount is paid back.
The monthly dollar savings to homeowners is directly calculated during the Obama mortgage modification, so calculating the savings provided to the homeowners would be easy.
When the homeowner eventually stops using the modified mortgage, the difference between the modified payments and the original mortgage payment could be calculated; this would be the amount the homeowner would need to pay back. The money would be split by the original lenders and the Treasury, based on their share of the modification reduction.
As the beneficiaries of the program pay capital gains over their lifetime, these payments would be put into a fund that distributes them back to shareholders in the fund. Shares would be given out each year, as modified loans are retired, in proportion to the dollar value of the forgiven mortgage amount that year.
The plan is not perfect. If home prices dont appreciate, the gifts will not be paid back, although it seems unlikely that home prices will not resume their long-term normal appreciation. And homeowners do get an interest-free loan, though inflation adjustments could be built in.
Whether you like or dislike the bailout plan for homeowners, we should all be able to agree that any bailout plan should not just give away money without asking for something back.
No-strings-attached gifts are a bad idea for the economy and should not be given to homeowners any more than to corporations.