An Economic Empowerment Tool for Solving the Foreclosure Crisis
The Homeowners’ Equity Corporation (HEC) is a for-profit stock corporation that purchases foreclosed residential properties in a local community, and through a “lease-to-equity” arrangement enables homeowners facing foreclosure to: 1) remain in their residence, 2) pay off the market cost of the residence, and 3) build up equity as shareholders of the HEC.
The HEC allows citizens to escape from the worst form of credit (loans for consumer goods that don’t pay for themselves and are made to people who can’t repay the loans) to the best form of credit (loans to purchase capital assets that pay for themselves and that turn non-owners into owners of income-producing assets). The HEC is based on a new monetary and tax approach that promotes the financing of private sector capital formation in ways that create new owners of that growth and thereby spread purchasing power throughout the economy.
One of the key characteristics of the Homeowners’ Equity Corporation is that it minimizes risks of the resident-shareholder foreclosing on the home mortgage by acting as a form of capital credit “insurance,” through pooling of risk. There will always be a certain percentage of homes that are unoccupied for a time, but the shareholder’s equity will be based on a HEC’s value per share, based in turn on the aggregate value of all homes owned by a HEC, not the value of the home occupied. Also, a HEC’s value per share will depend in part on the occupancy rate of all homes, as will the payments on the loans used by the HEC to acquire the homes. It is obviously much easier to make payments on 100 houses, of which 90 are occupied and generating rent payments, than on a single house with no rent payments coming in.
The HEC also provides a means for those who cannot afford monthly lease payments on their home, to participate in the lease-to-equity program. Vouchers linked to need (for a specified amount of time) could be provided. For example, 25% of a HEC resident-shareholder’s income would go to cover housing leases. The amount of the voucher to supplement this would be the difference between the homeowner’s total income and the monthly lease payments. To protect against people playing the system, there would need to be a limit on how much of a voucher someone could receive and for how long they could receive a voucher to remain in a particular residence owned by the HEC.
Advantages of the Homeowners’ Equity Corporation
For the resident-shareholder: For the resident-shareholder:
- Protects homeowners from losing their primary residence because of a bad loan.
- Saves homes of people in foreclosure, in danger of foreclosure, or who have given a deed in lieu of foreclosure.
- Allows the former owners of houses that have been foreclosed to acquire full voting, full dividend payout shares in a Homeowners’ Equity Corporation that holds title to their homes.
- Makes it much easier for homeowners to “sell” their homes by cashing in their equity shares. It is up to the Homeowners’ Equity Corporation to find a new tenant, not the resident’s problem to find a buyer.
- Allows tax deductibility of both principal and interest payments on acquisition loans at the corporate level.
- Allows tax deductibility of dividend payments (actually rebates of rent payments in excess of the company’s needs).
- The HEC could provide upkeep services (similar to a condominium association) to homeowners in the HEC, allowing for economies of scale to bring down the cost of yard maintenance and home repair.
For the lender: For the lender:
- Allows lenders to recoup a greater percentage of their bad loans.
- Allows lenders to sell foreclosed properties at market value.
- Spreads risk among many homebuyers and reduces insurance premiums.
For the local community: For the local community:
- Creates a more stable housing market less subject to speculative fluctuations.
- Allows additional planned development with the full consent of residents, providing affordable housing and a more livable environment.
- There will be a group of resident-shareholders focused on maintaining the value of all the properties owned by the corporation; setting quality controls.
For more information on Homeowners Equity Corporations (HECs), see: