PERSPECTIVE ON URBAN INVESTMENT : Well Is Not Dry for Inner Cities : We must tap resources in non-conventional ways; the mortgage market offers one such opportunity.

We all know the problems: a declining infrastructure, a massive debt burden, inner-city problems of decay, crime and unemployment.

The good intentions are there, as are the well-meaning people who recognize the absolute need to solve these problems but are without resources and a coordinated approach. Yet for decades, we’ve been a nation unable and unwilling to invest the resources our inner cities so desperately need.

Now, everyone agrees that the well has gone dry. But even when the resources existed, we were told that tapping the necessarily huge sums would only add to an out-of-control deficit--thus rendering the United States as financially irresponsible.

This attitude shows unreasonable pessimism and a dangerous lack of ingenuity. We have to put aside traditional notions of financing, to look beyond what is in place and come up with fresh ideas for revitalizing our inner cities.

The following proposal targets our basic problems without raising taxes and actually alleviates some of the pressures on the federal budget.

The essence of the proposal is to piggyback an additional fee on specially repackaged mortgages that are sold to investors. (These mortgages amount to $1 trillion per year.) Investors would voluntarily pay this premium in return for a legislated commitment that only the interest above the rate of inflation would be taxable. The premiums would be dedicated to financing solutions to our basic problems, including those facing our central cities.

The results: tens of billions of newly accessible dollars, surely enough to meet the President’s campaign target of $20 billion per year for rebuilding our infrastructure.

To illustrate: When you take out a mortgage, most of the monthly payment goes to interest and very little to reduce the principal. To generate more money for mortgages, the federal government allows your lender to sell your mortgage to investors. Under our proposal, it is these investors, commonly referred to as the secondary mortgage market, who would be entitled to the inflation-indexed tax advantage on the interest they collect from you. You would see no difference in your mortgage.

Because of the size and efficiency of this resale market for mortgages, premiums could be accurately calculated and would be deposited in an Enterprise Trust Fund.

If this program were adopted and Southern California allocated $3 billion from the fund, 66,000 jobs would be created, generating $578 million in taxes in the first year. There would be no loss of revenue to the federal government since the investor tax advantage wouldn’t kick in until the second year. The second year would generate $528 million in taxes paid, which would more than offset the $232-million loss to the Treasury. At no point would losses exceed the gains, making the program an economic stimulus.

The program would start with what we are calling Negotiated Community Investment Strategies: Each local government or groups of governments in a metropolitan area would decide, with input from community-based organizations and businesses, private investors and universities, on a strategy for achieving whatever is necessary for the community’s economic revitalization. This might range from job-creating development to education and training needed to upgrade skills. It could include day care, security or other investment needed to foster economic development.

Next in the picture is the federal Department of Housing and Urban Development, which would approve (or reject) the community strategy. HUD would then certify sales of pools of mortgages with the accompanying tax advantage. Private investors, government agencies and nonprofits would be able to apply to the Enterprise Trust for funds to execute the strategy. The trust, while administered by a bank or similar supervised entity, would be spent in accordance with the provisions of the specific strategy and not the traditional requirements of banking regulations. Oversight of the trust, however, would still be by the traditional examiners who oversee trust operations.

The advantages to our proposal?

- It would raise risk capital through the market processes, relying on preferential tax policy and not taxation and appropriation. Investment via this format will generate taxes and reduce demands on government spending.

- The community could develop its own strategies with the knowledge that the risk capital would be there, that banking rules or the need to gain a return on an investment fund would not prevent the expenditures.

- The private sector would implement the program, thus engaging the doers of our society in directly solving its problems. Local government determines its needs and private actors go to work. There would be no endless requirements passed down from the federal to the state to the local government and then to the community.

Where do we go from here? To Congress and the President. We look to them to see the opportunities, to create and pass all the necessary legislation and then let us get on with it. America has already spent too much energy worrying about its problems. We only have time now for solutions.