Defaults on mortgages on homes and businesses of American citizens are increasing beyond the means of U.S. financial institutions to resolve.
Specifically, the extent of these subprime mortgages today is estimated to be 700 billion dollars. More likely, it is closer to 1 trillion dollars.
To put this figure into perspective, 700 billion dollars equates with the 700 billion dollars the United States spends for all its petroleum imports.
The subprime mortgages held to maturity have a far greater value. With proper handling, this value can be realized as it has been in the past with the formation of the Resolution Trust Corporation which finally resolved the savings and loan crisis over a quarter of a century ago. And it might be added, this was done at a profit.
Act before the crisis takes hold. A possible solution could be this: Form a "National Redemption Mortgage Corporation" on a tax-free basis, giving that organization bonding authority and the right to sell bonds. Bundle all of the subprime mortgages under the central authority of the new Redemption Corporation. Establish a value on the entire bundle and set a price on the bonds that will be offered tax free to the public.
Get the money back into the banks. The formation of such a corporation will give assurance to the banks that they will regain their liquidity. Likewise, the general public will be encouraged to invest in the tax-free bonds, which also enables the banks to get back into the business of lending.
To get the bonds jump started, offer the first traunch — the first sale of bonds — at a substantially discounted price. Continue the process until all of the proceeds of the sale are back in the banks that held the mortgages in the first place.
Banks will be solvent again and will have the necessary liquidity to continue serving America's ever rebounding and vibrant economy.
This solution will not please everyone, and, no doubt, the banks and the American citizens may get a "haircut."
However, doing nothing will ensure that American banks and citizens alike get a "crewcut."
E. Ralph Hostetter, a prominent businessman and agricultural publisher, also is a national and local award-winning columnist. He welcomes comments by e-mail sent to email@example.com.
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