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It is now over two years since the credit crisis bedevilled the World economy, which leads to the question. Is there an opportunity to build on the efforts on the Obama administration and accelerate the recovery process in the World’s largest economy?

To date the administration has focused on rebuilding the balance sheets of the 19 major financial institutions to get cash flowing, combined with fiscal and infrastructure expenditure that will eventuate in the highest fiscal deficit/debt of the administration. Whether or not the policy of the administration will bear fruit is subject to a degree of debate, as is the impact on GDP in the next three to five years.

I put it to you it is now time to focus on revitalising the housing market. There can be no argument the housing market is central to the well-being of Americans and the American economy. The surest way to ease the credit crisis is to ensure Americans can access low cost finance to fund their housing aspirations, the single most expensive and continuous cash outlay in the purchaser’s life-cycle.

Fix housing, and all other areas of the economy will in due course recover. Jobs will be created in building and construction, in the motor industry, in whitegoods, in electronic utilities. In every sphere employment opportunities will surge, resulting in increased Federal and State taxes.

There is a need to return to the basics of a saving deposit and mortgage lending rates that provides the greatest benefit to increase disposable income by reverting to an improvement on the bankers old 3,6,3 rule, being 3% on deposits, 6% on loans and hit the golf course by 3pm. The requirement then is to set the deposit rate on savings at 2.5% per annum on savings, to sustain a long term fixed mortgage rate between 4.5% and 5% over 30 years.

In short, there is no single factor – excluding a lottery win – than can or will increase the long term financial wealth of an individual than access to long term low fixed rate mortgages.

Here is a quick calculation to consider:-

A thirty year fixed rate mortgage on a principal of $US250k less 10% deposit, with an interest rate of 5% will require annual repayments of $US14494.

The same principal $US250k, with an interest rate of 7.25% will require annual repayments of $US18419, an increase in interest expense of $US3925 per annum, or $US75 per week less cash in hand to you the borrower.

Let’s consider a simple and logical equation:-

Assume for a moment an annual income of $US75000k per annum and annual savings of $US6000k, combined with a mortgage of $US250k at 5% per annum, and a savings deposit rate of 2.5% per annum.

Using the same numbers for principal and earnings, but increasing the savings deposit rate to 5%, and the mortgage rate to 7.25% presents a totally different picture. The bottom line annual savings of $US6000 per annum decrease to $US2075 per annum.

Here is the impact after ten years:-

With a fixed rate mortgage of 5% and a savings deposit rate of 2.5%, net savings of $US6000 will result in total savings after ten years of $US68228 and an outstanding mortgage liability of $US289883.

With a mortgage rate of 7.25% and savings deposit rate of 5% net savings decrease to $US2075 per annum for a total net savings benefit after ten years of $US26963 and an outstanding mortgage liability of $US368375.

There is a need to refocus our financial acumen, and acknowledge the undeniable. The greater the rate of interest savers demand from financial institutions, the more financially disadvantaged is the individual. It can be clearly seen from the above example; financial wealth and well-being are influenced to an infinitely higher degree by the amount of disposable income or cash in hand retained, which is driven by access to a long term low interest mortgage rate.

The solution then is a no-brainer. Low long term mortgage interest rate can be sustained when each individual agrees to a lower rate of return of savings deposits.

All loans will be restricted to first time buyers seeking to purchase a home or apartment. Under no circumstances will a loan extend to the purchase of an investment properties.

To date the administration has set aside some $275 billion to provide mortgage relief.
Will the administration not take the plunge and support mortgage applicants by providing a further 5% to 10% deposit for home purchases? I can think of no better way to revive the housing and jobs market in the quickest time possible and at a fraction of the cost currently committed in the recent budget, combined with a guaranteed fixed return of 5% to government finances, and is intended to replace the buyers’ tax credit of $8000.

I put to you, the two factors addressed in this proposition; low mortgage rate and Federal funding of mortgage deposit are the catalyst to economic recovery. Simply knowing the proposals will be implemented will generate a massive psychological uplift in consumer confidence, and will no doubt trigger and economic upswing within six to twelve months.

The benefits to both Americans and all sectors of the U.S. economy will be substantial in that a lowering of the mortgage interest rate will flow through to the wider domestic economy and sustain downward pressure on other market interest rates.

In support of the above, the following criteria are submitted for review and consideration to avoid a repeat of the subprime crisis.

Mortgagor must open and retain an active savings account paying 2.5% per annum with their choice of banker and maintain the account in a continuous active status for one year before an application for mortgage finance is commenced. Interest will accrue at the rate of 2.5% per annum throughout the life of the mortgage. The fact that interest on savings will accrue at the rate of 2.5% will not during the life of the mortgage work to limit the ability of the mortgagor to obtain a higher return on savings via investments in the commercial market, and or, reduce the outstanding mortgage liability, as determined by the borrower.

Mortgagors must hold a deposit equal to not less than 10% of the total value of the property’s purchase price.

The Federal government will provide an additional deposit of between 5% and 10% of the property’s purchase price. The government’s contribution, whether 5% or 10% will be driven by the standard deposit currently expected of purchasers by the mortgage market.

The total principal financed must not exceed 3.5 times the annual household income starting at the lower level of $US50k per annum, and rising to not greater than 4.25 times annual income of $US100k per annum. This last requirement need be legislated, and be compulsory enforceable by the lender.

The borrower will be required to ensure at the time of mortgage approval, that the borrower is able to service the annual repayment liability, and further that annual repayments do not consume greater than 27% of annual base salary, excluding overtime. Again this requirement need be legislated and compulsory enforceable by the lender.

Additionally, legislation must also be in-acted to ensure financial institutions retain a capital adequacy ratio to cover the demand for mortgage finance on an annual basis.

Finally, as a means of ensuring there is a means on preventing a housing bubble – this will be partial controlled by the maximum limits tied to annual income – steps need be taken to ensure the available stock of housing will meet future demand.

Now more than ever the economies of the world need to get past the credit and economic crisis, the GM’s and Chryslers, the millions of job losses and the horrendous state of the housing market. People everywhere need more than hope. They urgently need a goal that is tangible; a goal that can be seen in clearly defined terms; and in a clearly defined time frame, and it is needed now!

There can be no surer way of outlining a clear defined path to an economic recovery than by providing the most direct and straightforward vision to achieve the outcome by re-energising the housing market, and in turn creating the millions of jobs to sustain the recovery. It is absolutely vital the threat of inflation and a substantial increase in market interest rates is avoided, if the stimulus plans announced by President Obama are to have any chance of success.

This proposition will deliver low interest market rates for years to come. The alternative, high interest rates, falling wages, depreciation of the US dollar, increasing cost for housing, and the daily necessities of life for food and clothing, combined with massive increases in energy cost.

President Obama’s administration has taken steps to maintain downward pressure on interest rates, yet the ten year yield on treasury paper has risen to 4%, and the 30 year fixed mortgage rate is 5.7%, with gasoline prices again approaching $US70 plus a barrel. So the question is can you afford to sit back and watch as mortgage rates continue to increase, and more and more of your hard earned dollars are used to meet the monthly mortgage repayments?

Right now, you have the ability to build on the administration’s initiative to maintain downward pressure on interest rates and secure your financial well being in the immediate and long term future. It is within your power to influence the decision process leading to a long term fixed rate mortgage of between 4.5% and 5%. Now is the time to communicate this requirement to your congressman and keep those hard earned dollars where they belong, in your hip pocket.

You can take action to make this proposal a reality and secure your future and that of your children. I urge you do not let this once in a lifetime opportunity slip through your fingers. You can make a difference!