Saving the Economy with IRA Funds

by: Stan Muse May 12, 2008 | about stocks: C / NCC / WB / WM / XLF    

Stan Muse

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The US economy is in serious trouble due to the recent mortgage crisis and resulting inventory of houses on the market. The Federal Reserve has taken positive action, but has nearly reached the limits of what it can do by cutting the Federal Funds rate and backing illiquid institutions. There is an immediate critical need for a very large infusion of capital into the financial and housing markets.

The answer is staring the government in the face. One readily available large source of capital is individual IRAs, which hold many trillions of dollars. If these IRA funds could be released and directed to the mortgage lenders and to the housing market, we could possibly avert, or at least significantly shorten, the economic recession we now find ourselves in.

Creating a new type of investment vehicle, a bond or coupon, which could be held in an IRA is the answer. It would require legislation because this is not allowed today. IRS rule 4975 prohibits IRA transactions with related prohibited parties. The bond would be issued for the amount of a person’s current mortgage principal on their primary home, and be held in their personal IRA account as an investment vehicle. Ideally, the bond would be negotiated between the private sector IRA administrator and their IRA client to avoid a government agency bottleneck. All private IRA management firms would be required to issue the bonds.

Individuals would need IRA funds to pay mortgage balance if full. The IRA administrator would issue the bond and transfer the principal amount to the individual’s mortgage company, and the mortgage is paid in full. The IRA fund would continue hold the bond in the IRA account and the individual must buy back the bond in order to sell the house. The amount of disbursable IRA funds would be reduced by the amount of the bond. The entire process should be as electronically automated as possible.

If only 10 million people were issued these bonds for an average of only $100,000, the result would be $1 Trillion in paid-off mortgages. Many people have much more than $100,000 in their IRAs. It makes sense to allow them to use that money to invest in the best and safest investment they could ever make, their home. By executing the bond, the annual mortgage payment would become disposable income for the consumer to put back into the economy each year. If only 10 Million people were able to put back $10,000 per year into the economy, the result would be $100 Billion per year.

It all makes a great deal of sense to create an investment vehicle backed by the best investment and individual can make – their home. It makes no sense for someone with say $500K in an IRA to loose their home because they lost their job and can not pay their mortgage. It also makes sense because it is not some form of government bailout which rewards the bad behavior of mortgage companies and unqualified borrowers. Instead, it rewards the good behavior of those who have saved and invested in the economy.

Some of the benefits would be to:

  • Release an enormous amount of capital trapped in IRAs into the housing market
  • Immediately increase individual disposable income by tens of thousands of dollars each year
  • Actually Increase federal, state, and local tax revenues by eliminating individual mortgage interest tax deductions, without raising tax rates
  • Create demand for housing to reduce inventory
  • Create jobs throughout the economy
  • Create opportunity for some to purchase their first home, ‘debt free’
  • Encourage individual IRA savings
  • Reduce individual debt
  • Increase needed liquidity for mortgage lenders
  • Not increase the money supply and contribute to inflation
  • Transfer the housing risk from the mortgage company to the individual home owner

Mortgage firms like Citigroup (C), Wachovia (WB), Washington Mutual (WM), and National City Corp (NCC) are in desperate need of large infusions of capital and are diluting their companies to get it from private equity firms. Their 5 year stock charts look like a waterfall and their stock prices have fallen back to or near their all-time lows. Thrifts are in even worse shape.

The merits of creating such an investment vehicle are obvious and would benefit everyone involved. The individual gets more disposable income and a chance to live debt free, the capital markets get needed liquidity, the government collects more taxes, the housing market gets more demand, and the general economy gets a much needed boost. The IRA bond would be a win win win win win.

Disclosure: Author is short C, WB, WM and NCC.

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This article has 28 comments:

  •  
    May 12 08:59 AM
    It had to happen, someone had to say that there is some cash being put aside for the future, let's raid it now to help out these poor banks. Wasn't a huge point with the IRA to have something for old age - so the gov't can skate on its promises with SSA, etc.? So, now let's raid what's left -- no problem -- Oh, until these people are out of a job because of age and have no money. Yes sir, all spent -- and this time to keep banks happy because they shouldn't have put these people into a house that was too expensive.

    Yep, another short term political solution with long term devastation as ... OK, 'cause we are here and now... <sigh>.
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  •  
    May 12 09:31 AM
    There is a major problem with this proposal. If a person "buys" his mortgage with this IRA bond, he will use aftertax dollars to retire the bond and therefore be double taxed when he removes income in retirement. This problem can be resolved from the point of view of the IRA owner by passing legislation that either (1) allows repayment of the bond with pre-tax dollars (expanding the IRA contribution limits) or (2) converting the bond to Roth status.

    Either of these solutions to the double taxation problem would remove hundreds of billions in future tax revenue. Thus, future tax payers would pay for this "rescue". In other words, if we avoid pain today we will simply defer the pain to our children and grandchildren.
    Reply | Link to Comment
  •  
    May 12 09:36 AM
    I think I understand your general concept, but I also agree with Joe B. The initial fault lies with the banks for letting this happen. What's more, if people did pay off their mortgage with their IRA, I suspect the average rate of return for real estate to be flat, to 2 2-1/2% for the foreseeable future.
    Reply | Link to Comment
  •  
    May 12 10:07 AM
    I have an IRA and it is in safe investments. This fellow's proposal is a terrible idea.
    Reply | Link to Comment
  •  
    May 12 11:01 AM
    I could not believe that anyone from the world of finance would be making such a ridiculous proposal as has Stan Muse. Then, I read his bio and learned he has spent his adult life in the world of tech where most are dreamers of Nirvana, peace, and love. He but echoes all the silly proposals of the wacko left that, too often, come from this sector.

    If Mr. Muse’s preposterous idea was to be enacted, we would have the same mess we have with the Social Security Trust Fund that the Congress has borrowed into near bankruptcy and is supporting with valueless IOU’s.

    Stick to programming, Mr. Muse, and leave the real world problems to people whose feet are planted, firmly, on solid ground and reality.
    Reply | Link to Comment
  •  
    May 12 11:05 AM
    NO, NO, NO
    IRA accounts should be protected from high risk and non-secured investments and scams. This guy suggests taking retirement funds prudently earned to pay for unscupulous lending and selling practices by the banks and down stream markets. Retirement funds need better protections from these types of ideas, particularly self-directed IRA's which are a con man's dream come true.
    Reply | Link to Comment
  •  
    May 12 11:06 AM
    i think this is the silliest and most absurd idea I have heard in eons! go back to bed.
    Reply | Link to Comment
  •  
    May 12 11:48 AM
    Mr. Muse, this is outrageous. You are a burglar in techie, yuppie clothing. Please do not post any more articles on this site. You stink.
    Reply | Link to Comment
  •  
    May 12 11:57 AM
    I think it makes some sense to use your own money to finance your home. If some of your IRA is invested in bonds, where are you going to get a safe bond with the equivalent rate of your mtg? The worst case scenario is that you foreclose on yourself.
    Reply | Link to Comment
  •  
    May 12 11:57 AM
    Got to agree with most of the comments that this is a bad idea. Let's not compound the problem by raiding retirement accounts.
    Reply | Link to Comment
  •  
    May 12 12:22 PM
    Is this Seeking Alpha or the Onion?
    Reply | Link to Comment
  •  
    May 12 12:22 PM
    So you wanna make people throw thier IRA money into the fire? Hahahaha
    Reply | Link to Comment
  •  
    May 12 01:00 PM
    This guy needs to be BANNED from this site, administrator!
    Reply | Link to Comment
  •  
    May 12 01:22 PM
    Well, from the comments so far we have to conclude that some people:

    1) do not like money, and prefer to send it to mortgage companies rather than spend it themselves
    2) believe they scanned themselves when they bought their home, or prefer to rent, because it is a bad investment
    3) need government restrictions to keep them from scamming themselves in the future. The do not realize that they can already borrow against IRA funds, invest in REITs, AND can invest in specific parcels of real estate using companies like First IRA Mortgage, just not their own home because of the IRS rule.
    4) believe that their own IRA funds manager is out to scam them (why do they not find another?)
    5) do not think that there is a time value of money, they would rather be able to use their IRA funds later rather than sooner.
    5) prefer government bailouts, like the one Congress just passed which rewards bad behavior, over the free market since this would be a free decision on the part of the homeowner
    6) do not believe that the best investment one can make is in owning a home because they do not realize that it appreciates AND saves them living expenses over any other investments they may choose
    6) believe that owning a home free and clear would be terrible
    7) lack reading comprehention skills

    Now, Let's have some intelligent comments like btr0037.
    Reply | Link to Comment
  •  
    May 12 02:04 PM
    I see nothing wrong with freedom--those owning $500K+ IRAs currently are free to pay tax and penalty, so as to pay down/off their residential mortgages. The new govt program described is NOT NECESSARY! Furthermore, anyone with half a brain realizes that any such new program would (shortly) begin to scarf up the puny IRA balances of tenants, so as to subsidize the retirements of the scum-bag liars who took out liars' loans. Since socialism is Maseratis, scum-bags ride in style.
    Reply | Link to Comment
  •  
    May 12 02:40 PM
    While I don't necessarily agree with the proposal, it is nice to see someone actually come up with a proposal of any sort that lies outside the box... And lets face it, IRAs probably have done more to boost the market since inception than any other one factor ... Maybe it makes sense to use the 'forced retirement' funds to support homeownership. Does anyone really think the present administration is capable of fixing the problem? I don't.. I suspect they'll just let the housing market die the 'death of a thousand cuts'... And, present and future generations will foot the bill in ways we haven't even considered yet..

    Thx jegan
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  •  
    May 12 05:21 PM
    I agree with John's comments. It's a lot harder to come up with something new of your own than to take pot shots at something someone else comes up with. Furthermore, putting down new ideas discourages others from suggesting their new ideas. The benefit of brainstorming is that there usually is a nugget of gold somewhere in most ideas; but, many times, you have to combine that nugget with someone else's to get to a workable solution. If you discourage new ideas you miss out on the bonanza. Keep your mind open, choose the suggestions you like but try not to put down the originator of the ideas you don't agree with because, in the long run, you may end up shooting yourself in the foot.

    Regarding Stan's suggestion, the objective of most people is to pay off the debt on their home, hopefully, by the time they retire. Why does it not make sense to use one's IRA to do this since its aim is also to provide for one's retirement?

    From the point of view of retirement cash flow, does not reducing one's outlay for mortgage payments (by eliminating debt) have the same effect as increasing one's income by purchasing investments? I don't understand why it is OK to do one but not the other.

    Personally, I would like the flexibility to be able to use any of my financial assets to pay off any of my financial liabilities. In this particular situation, I'd prefer to be able to use my IRA's assets to pay off my mortgage directly rather than substituting it for another debt instrument owned/serviced by someone else; I don't know why I would want to or need to bring in a financial intermediary to accomplish this.

    In any case, I appreciate Stan giving me the opportunity to think about his suggestion.
    Reply | Link to Comment
  •  
    May 12 06:31 PM
    Good post, User 86865. The penalty imposed for early withdrawal of assets owned by us is one more example of contemptible government paternalism. I'm guessing, however, that most individuals facing a foreclosure of their home have not bothered to establish savings in any form to which they might turn to stave off foreclosure.
    Reply | Link to Comment
  •  
    May 12 06:50 PM
    Many people had and have good intentions of paying their mortgages. If IRAs and 401k could be tapped to save their home from foreclosure, I bet many would do it. The gov't could be considerate and consider this a "roll-over" of sorts if it went directly to the lender to pay a down their mortage so that it would be a tax-free transfer. If a family has $500,000 in a 401k - whats wrong using it to avoid homelessness?
    Reply | Link to Comment
  •  
    May 12 09:18 PM
    make the ira tax free...and i might...just might...listen.

    however, tell that to the dem controlled congress as they jack up taxes. hahahahahaha
    Reply | Link to Comment
  •  
    May 13 11:49 AM
    Wow, the genie is out of the bottle. When Congress hears about this it will become law. Brokers as GS will know where the next $27B of bonus money will come from. The sickness goes on, and on, and on.
    Reply | Link to Comment
  •  
    May 13 03:08 PM
    What %, do you think, those sadly at risk of losing their homes to foreclosure, have anything near $500,000 or even $25,000 in an IRA?
    Reply | Link to Comment
  •  
    May 14 03:29 PM
    Using one's own money to purchase has always been the best as long as you put it back in your pile. Even if you lose some interest on that money, it offsets interest owed and usually at a higher rate.

    Using it to purchase good property can be a nice investment if the value isn't out of whack. First, think about your own family security.
    These unscrupulas lenders need to bear responsibility for their mistakes and take the hit. After the dust settles, there will be fewer of them and those left will be better because of it.

    We tax payers need to stop bailing out those involved in deception.
    Reply | Link to Comment
  •  
    May 14 05:36 PM
    Can we please stop throwing the lenders under the bus? It's patently absurd. People make their own decisions. If they want to buy snake oil thinking it's a miracle cure for cancer, so be it! If you can't understand a loan document, title document, or any other document, then don't sign it. The lack of responsibility and the rampant finger-pointing in our country has gotten out of hand. Take care of yourself and quit whining about your bad decisions.
    The government shouldn't play big brother. We need to quit looking at it to come and take care of the mistakes we make in our lives. Grow up.
    I think using pent-up savings to get debt free is a great idea, especially with a built-in plan to repay yourself. It's self-sustaining and a defined contribution to your own wealth.
    For those who think that this idea bails out banks, try thinking before you speak. Banks make money on loans. If you pay them off, they make no money. This bad scenario is made even worse by that fact that folks who probably haven't socked away enough money in their retirement accounts to pay off the mortgage, and lack the discipline to save in general, are the ones left owing the bank. So now credit quality deteriorates due to strong borrowers being absent and balance sheets shifting to those who are higher credit risks.
    I think transfering retirement assets into your home is a great idea. Now if only we can get rid of the property taxes that steal property from the rightful owners, we might be able to make some progress. I think it's kind of silly to work your whole life to have a home that you own and is your shelter only to have it stolen from you because your fixed income in retirement isn't sufficient to pay off the extortion--but I digress.

    Neat idea, Stan!!!
    Reply | Link to Comment
  •  
    May 14 08:10 PM
    It's not absurd to hold lenders responsible for lying, fudging numbers, etc. to get people they knew to be unqualified into mortage loans. You can hold the snake salesman responsible for his misdeeds. In fact, selling something using false pretenses can be construed as fraud and thus a crime. Certainly there was complicity among those who took on the loans, but they were the suckers. The lenders were the suckees.




    On May 14 05:36 PM Your Own Two Feet wrote:

    > Can we please stop throwing the lenders under the bus? It's patently
    > absurd. People make their own decisions. If they want to buy snake
    > oil thinking it's a miracle cure for cancer, so be it! If you can't
    > understand a loan document, title document, or any other document,
    > then don't sign it. The lack of responsibility and the rampant finger-pointing
    > in our country has gotten out of hand. Take care of yourself and
    > quit whining about your bad decisions.
    > The government shouldn't play big brother. We need to quit looking
    > at it to come and take care of the mistakes we make in our lives.
    > Grow up.
    > I think using pent-up savings to get debt free is a great idea, especially
    > with a built-in plan to repay yourself. It's self-sustaining and
    > a defined contribution to your own wealth.
    > For those who think that this idea bails out banks, try thinking
    > before you speak. Banks make money on loans. If you pay them off,
    > they make no money. This bad scenario is made even worse by that
    > fact that folks who probably haven't socked away enough money in
    > their retirement accounts to pay off the mortgage, and lack the discipline
    > to save in general, are the ones left owing the bank. So now credit
    > quality deteriorates due to strong borrowers being absent and balance
    > sheets shifting to those who are higher credit risks.
    > I think transfering retirement assets into your home is a great idea.
    > Now if only we can get rid of the property taxes that steal property
    > from the rightful owners, we might be able to make some progress.
    > I think it's kind of silly to work your whole life to have a home
    > that you own and is your shelter only to have it stolen from you
    > because your fixed income in retirement isn't sufficient to pay off
    > the extortion--but I digress.
    >
    > Neat idea, Stan!!!
    Reply | Link to Comment
  •  
    May 15 08:18 PM
    Most IRAs have limited investment opportunities, allowing investments in only equities (mutual funds) or bonds. An IRA is not a safe investment, moving up and down with market. Personally, I consider IRAs a pyramid scheme, encouraged by corporations, financial institutions, and governments, to take our money. Board members, particularly CEOs, make 8-9 figure salaries by exercising stock options regardless of the performance of the company, and financial institutions ... well, we all know of the billions in bonuses financial institions such Goldman Sachs hand out. They simply take our retirement funds and pass them around. Real Estate, on the other hand, is a much safer investment, and we should be allowed to invest our retirement in real estate, though, at the same time, not be allowed to mortgage our retirement. Unless the loan can be paid in full, or the property bought outright, the money should remain in a retirment fund. Currently, you can borrow substantial amounts against a 401k, and people that have sufficient funds in a 401K would only be facing foreclosure by choice. Limited funds can also be borrowed against a IRA in a foreclosure emergency. If unable to pay back the loans, and the loan is for your home, you should not have to face penalties, and only have to pay taxes distributed over the duration of the loan.
    Reply | Link to Comment
  •  
    May 17 08:42 PM
    ABF, how is owner-occupied residential real estate an investment at all? It generates no cash flow. It produces nothing. It has maintenance and operations costs, and if you borrow to buy it, it has financing costs (if you don't, it has opportunity cost). In return for those costs, you're taking the risk that the property you buy will be valued more by the market at the time you want or need to sell it. Sounds a lot more like speculation than investment, doesn't it? If you do the math, most people are much better off renting. Leave speculation to those who can afford to lose what they put in.
    Reply | Link to Comment
  •  
    May 20 08:50 AM
    bearfund, you need to do lunch with Suzie Orman or Dave ramsey. What has been described is an interest free loan secured by your house in your IRA. You would be able to pay the money back to your IRA, and pay off your house in less than half the time, with what you would normally pay the bank each month and save hundreds of thousands in interest payments.
    Reply | Link to Comment
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