The corona virus occurrence has and will dramatically change the economic outlook for many countries in the world, including the one for the U.S. Not until a vaccine is produced and accepted as safe for users, will this threat continue to live on. Currently consumer preferences are rapidly changing, including avoiding local and international travel. Supply chains are and will also be seriously affected as some of the most important exporting countries, (China and South Korea) are bearing the brunt of the virus infections.

What has this to do with the subject of this paper: “How home equity can be used to fight a recession”. At first glance little, but as will be explained in the paper actually quite a lot.

The likely results of the corona virus in economic terms will be company closures and/or staff reductions, which will be reflected in reduced earnings, both for companies and individual households leading to higher unemployment levels.

Obligations on home mortgages will for quite a few households become a very heavy burden. Home mortgage obligations are currently not linked to income fluctuations, neither in the U.S., nor in any other country.

Secondly the concept of the “Bank of Mums and Dads” can only apply to households where the Mums and Dads are in a sound financial position themselves. The worldwide low interest rates and the expected reduction in pension payouts as a result of falling stock markets will reduce the scope for such financial assistance for many parents.

The proposals, as set out in this paper, directly links income levels with the ability to service mortgage debt. 

The second and probably even more important element is to extend the concept of the “Bank of Mums and Dads” to a new government entity: “A Mortgage Debt Stability Fund” (MDSF).

The aim of the MDSF is to facilitate the temporary withdrawal of home equity as and when macro economic situations require it to do so. An MDSF helps fight recessions. 

The currently applied system turns such home equity withdrawal into a loan rather than a cash withdrawal from personal bank accounts. The latter involves no charges. The MDSF can have the latter capacity. Federal Reserve funding to the MDSF (another form of QE) can act as the National Bank of Mums

How home equity can be used to fight a recession. A U.S. case study

At the time of writing, in many countries the corona virus has not reached its peak yet. The virus has led to unimaginable consequences for all types of businesses and for individuals.

Governments have shut down many economic activities, due to the possibility of ever increasing levels of infection. In some countries a total lockdown has been promulgated. 

The measures taken, so far, in the U.S. and in many European countries all point to an unprecedented level of financial assistance for companies, for workers who have lost most or all of their income and of course for the health services.

During the 2007-2009 financial crisis about 8 million Americans lost their jobs. It has been reported that the White House estimates that the unemployment rate will go up to 20%, which would imply that by June/July 2020 over 30 million Americans would be unemployed. This statement was later denied.

Job losses mean income losses and defaults on home mortgages and other loans. The U.S.$ 2.2 trillion economic rescue package will cushion some of the losses, but companies need time to recreate employment. One cannot put a precise date on it, but experiences from previous crises has shown that it will be a matter of years rather than months, before the level of unemployment will have returned to the 5.8 million reported by the Fed as for February 2020.

In the past, the writer has analyzed the four sources of wealth in the U.S.:
Stock market values, U.S. government treasuries, pension savings (overlapping with stocks and bonds) and the net worth built up in homes.

The Dow Jones Industrial Average reached its peak on 12th February 2020 with a value of 29551; by 23 March 2020 it had dropped to 18592 or a drop of 37%!

U.S. government bonds and quantitative easing activities will increase by at least U.S.$2.2 trillion. Pension funds invested in U.S. stocks and in government bonds, will have shared in the fall of the Dow Jones and in the lowering of interest rates.

The only source of U.S. wealth, mostly untapped, is the housing stock net worth of just over U.S.$ 23 trillion. A new Home Equity Release Method (HERM) will be set out in this paper.

Rebuilding the U.S. economy after the corona virus pandemic: a new Home Equity Release Method (HERM)

This paper will focus on the relationship between mortgages and income developments in the U.S. 

Individual household’s asset values and liabilities obligations are often combined; for instance in home mortgages. The two main sources of savings, built up over a lifetime, are pension savings and the net worth embedded in one’s own home.

Pension savings are normally deducted from annual income levels and transferred to specialist collective pension funds or insurance companies; an instant cash transfer. Mortgage borrowings are different in that future income levels are committed in meeting the payment obligations. 

The U.S. financial crisis of 2007-2008 was a home mortgage crisis. From 2004, some irresponsible lenders enticed many buyers to acquire homes in the U.S., of which a number of homes were bought for speculative reasons.

In the U.K., the main reason of increasing house prices, above average income growth levels, is that house-building levels have lagged behind population growth levels for at least the last ten years. About only 160,000 homes were built per annum, while the population growth required between 230,000 and 300,000 homes annually.

In the U.S., during the period 2004-2008, the financial sector made a huge collective mistake in assessing what was the appropriate individual mortgage level. The buyers over this period -many of them lower income households- were confronted with large numbers of repossessions after 2008. Heavy job losses occurred.

Where economic theories seem to fail is when liabilities, like a home mortgage, can at the same time represent an asset with an embedded value in a home.

Many households in both the U.S. and the U.K. were and are “displaced”, either by repossessions or by the inability to purchase a home.

There exists, as yet, no government institution in either country that is able to replace bank funding, when income levels drop in a recession. High unemployment and falling wage levels reflect recessions. The key is to stabilize mortgage expenditure levels as a percentage of incomes over long periods of time. Banks cannot operate such products; only a government institution can do so.

Why and how such a system can work in the U.S. is explained in this paper.

Inequality as a Source of Recessions and Poverty

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Inequality as a Source of Recessions and Poverty