Fresh Plan for Buying First Home

Most Americans are capable of remarkable sacrifices, if they believe in what they are sacrificing for, and I can think of no stronger reason for sacrifice than the chance to own their own home.

But I’ve also noted that a growing number of young Americans no longer believe they can achieve this part of the American dream. I think this is really more a lack of certainty over their futures than any permanent loss of faith in themselves.

What is needed, I think, is fresh thinking on how to finance home ownership and some dynamic national and local leadership on the issue to nudge young Americans into a more positive frame of mind toward achieving the goal of buying a home.

In June, I wrote to President Bush, as well as congressional and business leaders, to suggest a way to accomplish this.

I began by taking a fresh look at the home mortgage industry, and was reminded of just how enormous it is--more than $700 billion in new mortgages each year.

Voluntary Indenture

But as impressive as these numbers are, what should not be overlooked is the fact that with these loans, American consumers voluntarily indenture themselves to pay out a significant portion of their lifetime earnings.

And in 1986 alone, $658 billion in new loans had the effect of “locking in” a transfer of about $60 billion each year from borrowers to creditors for upward of 30 years.

So I asked myself why this enormous source of capital should flow exclusively into private lending institutions--particularly when our nation must increasingly depend on foreign capital to pay its bills and has a $2.8 trillion national debt.

The solution seemed quite clear to me: channel some of these billions now flowing into private hands into public hands for the broader national good--like balancing the annual budget and paying down the national debt, to name two examples.

Three Primary Issues

I theorized that if a good portion of that $60 billion being paid out annually in mortgage installments could be diverted into our federal Treasury, and if this was repeated each year, it would mean a buildup of upward of $300 billion a year in new capital.

But to do this would require taking a fresh look at how home buying is now done in America. Three primary issues would need to be dealt with.

First, our “buy-now-pay-later” mentality toward home buying must somehow be discouraged. Our habit of borrowing 80% to 90% mortgages amortized over 30 years may be convenient, but they’re deadly to every home buyer’s lifetime purchasing power.

Second, mortgage lenders must be offered inducements to get them to offer shorter-term, lower-leveraged home loans.

And third, the federal government must be sold on the wisdom of revising the U.S. tax code, so that money saved for home buying would be exempted from taxation, just as mortgage interest payments are.

Own Home by 40

The centerpiece of my proposal is a 15-year “National Homebuyer Savings Program.”

If structured properly in the legislation, I am convinced the program would make it possible for any working American citizen who wishes it to own a home by the age of 40, and eliminate America’s need to rely on foreign investment capital to balance its budget.

The standard program would run for 15 years--with an extended program of 21 years being offered to those whose gross income fell below a minimum of, say, $30,000 a year.

Most would plan their home buying in three phases over a 15-year period: the “Starter Account Phase” when savings would be placed into any savings institution much like an IRA account; the “Treasury Account Phase” when savings would be deposited directly with the U.S. Treasury to help meet our government obligations, and the “Home Purchase Phase” when the home buyer would buy his or her home through a private short-term, low-leveraged mortgage.

Starter Account Phase: This savings account could be opened in any institution authorized to handle an IRA, Keogh or 401(k) plan. Savers would be granted the same dollar-for-dollar tax deduction enjoyed by homeowners and allowed to deposit up to 20% of their gross earnings in any single tax year. This account would introduce a “level playing field” into the proceedings--and thus, I would hope, encourage millions more Americans to save for a home.

The use of thrift institutions, banks, security brokerage firms and credit unions as the repository of this phase of the home buyers’ savings would offer them a reason to support this radical departure from traditional home financing.

The major differences in this type account and, say an IRA, would lie in its planned use and the maximum term of its existence. For example, most savers would be limited to an account period of 10 years plus a six-month grace period, but for savers whose income fell under $30,000 the account period would be 14 years plus the grace period.

Two 5-Year Phases

The starter phase would consist of two five-year periods.

The first would be the “maximum deposit period,” during which the saver would make regular monthly or lump sum deposits into a restricted account. At the end of each year, deposits equaling up to 20% of the saver’s gross earnings would be tax deductible, as would be all interest earned on the account, so long as they were left undisturbed. Only interest could be drawn out, but would then become taxable.

The second five-year phase, called the “asset management period,” would overlap the Treasury Account Phase, and would be a passive income earnings period, during which no more money would be added to the starter account.

During this period the saver would be permitted to manage his deposits by transferring his account (within limits) from institution to institution to get the best possible earnings.

Treasury Account Phase: The future home buyer would continue to save during this phase, but all additional money would now be deposited directly with the U.S. Treasury. By making these deposits over another five- to seven-year period, the saver would, in effect, be repaying the government for the special tax exemptions received from both starter and Treasury accounts.

To induce home savings to stay the full course, I recommend an even more favorable tax treatment of savings deposits during this Treasury account phase.

For example, annual deposits during this phase would be granted exemption at the rate of 150% for those with gross incomes of $30,000 or more and 200% for savers with gross earnings of under $30,000.

As with the starter account, savers may deposit up to 20% of their gross earnings in any year. In this phase, the government would pay a flat 6% cumulative interest over the five- to seven-year holding period. Here again, interest earnings also would be tax-exempt, and the same restrictions would also apply with regard to withdrawals of principal or accrued interest.

I believe the U.S. Postal Service would be the ideal conduit for this Treasury account phase. Its branches are everywhere, and with specially installed windows equipped with bank-style automatic teller machines, funds could be routed directly from bank accounts into the U.S. Treasury.

Home Purchase Phase: At the conclusion of the second phase of the “Homebuyer Savings Program,” the combined savings from the two separate accounts--Starter and Treasury--would be transferred into a purchase escrow account arranged by the home buyer within the six-month grace period. At this point, a home would be chosen for purchase.

Home buyers would be encouraged to make a 50% down payment on their home and to select a fully amortized five-year loan for the balance. The government could assist this move to 50% loans by offering special money rates at the Federal Reserve discount window to lenders who cooperate.

Here’s an example of how the program might work:

Had a mid-20s couple, earning a combined $40,000 income, begun a starter account in 1986 on a savings schedule of $650 a month, they would now be preparing to start their Treasury account in 1991.

Home Purchase

If their goal was to buy a $300,000 home in 1996, they might step up their savings to about $1,150 during the Treasury account phase. They might reasonably expect to have not less than $175,000 in their combined starter and Treasury accounts by year-end 1996. They would then begin phase three by purchasing their home with, say $20,000 going to closing costs and furniture, and the balance of $155,000 going as the down payment.

With a $145,000 loan at 9.5% ARM interest for five years, their monthly payments of $3,021 would be about the equivalent of $1,745 in 1986.

But more important, had the same couple purchased an equivalent property in 1991 with a standard 20% down payment, at the equivalent price of $182,335, and with an 80% 30-year mortgage of $145,868, payable at about $1,217 a month--the result would have been $292,217 in interest payments over 30 years--instead of only $36,260 in interest under the five-year amortization plan I’ve proposed.

In other words, by my plan, the couple would be saving upward of $256,000 of their total lifetime earnings by opting to buy under the National Homebuyer Savings Program. And they would own their home free and clear by age 40.

My proposals may not be the complete solution, but it seems to me, they at least deserve a fair airing in the court of public opinion. What do you think?

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