Alternative Solutions and Tools For the Treasury and the Fed to solve current US Financial Crisis

BY EMAIL and FAX to POTUS and POTUS-Elect for their Monday November 10th 2008 meeting.

THE CANDU MEMORANDUM - FINANCIAL CRISIS SOLUTIONS - UPDATED NOVEMBER 9, 2008 WITH Federal Reserve Bank Insurance Tool and HOME BUILDERS ADDITION-AVOID ECONOMIC PANIC

Urgent President Bush (and President -Elect Obama),Congress, Treasury Secretary Paulson and Fed Chairman Bermanke need to read THIS CANDU MEMO ALTERNATIVE SOLUTION FOR MAIN STREET AND WALL STREET - SPECIFIC CHANGE PROGRAMS TO PROVIDE THE TOOLS TO SOLVE THE FINANCIAL CREDIT CRISIS, TO STABILIZE AND IMPROVE THE HOUSING MARKET VALUES AND THE RESIDENTIAL MORTGAGE FINANCING CRISIS USING THE THEORY OF TAX-ENOMICS. - THIS IS A TIME IS OF THE ESSENCE MATTER AND MUST BE DEALT WITH FORTHWITH.

Every time the Federal Reserve Bank dumps money in to or bails out a bank or investment company it is creating financial fear and panic, because the banks and investment companies have no incentive to start relending and also are keeping the cash for a rainy day.

IMMEDIATE SOLUTION:All the Fed has to do is provide an insurance vehicle for banks to lend each other and for banks to provide commercial loans and credit linesand other required loans (student loans and autos for example). The borrower pays the premium to the Fed. Insurance instills confidence not fear. Using this type of financial lending insurance tool, can be applied globally. The detailed programs are set forth below.

As FDR and Barack have said "ALL WE HAVE TO FEAR IS FEAR ITSELF".

These are Bipartisan alternative FINANCIAL CRISIS solutions that will cut the bailout program by 50 to 75% with more defined and comprehensive results - and will restore consumer confidence in the financial and economic markets.

Special new tool for Treasury Secretary Paulson and Chairman Bermanke- To lubricate the plaque filled financial arteries the Federal Reserve Bank (the "Fed") can sell insurance to banks for a "Fed" guarantee of bank short-term loans between banks - similar to FDIC or FHA guarantees. The insurance, paid for by the borrower,is charged by the Fed Reserve Bank (one method would be a 1/4 point (.25%) for a 25% principal guarantee, 1/2 point (.50%) for a 50 % principal guarantee, 3/4 point (.75%) for a 75% guarantee, and 1.0 Point for a 100% guarantee).

The banks would be able buy similar guarantees on their unsecured and secured business credit lines they give businesses where the businesses will pay a Fed Insurance premium for the guarantee. Based upon the credit a business can be qualified for the appropriate guarantee for the business credit line or loan. This could also be used for auto loans, equipment purchases and student loans, and other financial tools.

By using an FDIC /FHA type insurance premium guarantee program as the basic model (Both finanically proven successful) this will immediately expand the confidence level in the financial markets, because the insurance premium guarantee program will use minimum funds from the FED, and provide maximum available credit availability. A capital reserve ratio of 10 to 1 may be a possible model.
There has to be strict guidelines and adequate oversight for this program to work.

In order to gain more liquidity in the financial credit and residential mortgage market and to provide the proper tax and economic incentives to stimulate home purchases and help stabilize the residential market values, I propose certain changes using the Theory of Tax-Enomics that will be beneficial to the both the borrower, the lender or assignees of securitized mortgage pools and to qualified home builders.

1. The FHA Residential Lender Investment Program: Economic Incentives to decrease the supply of REOs (real estate owned foreclosed homes held by mortgage Lenders)

• The "FHA Residential Lender Investment Program" (FHA-RLIP): should include the limited purchases from the lenders of a percentage of REOs (one type of the toxic assets owned by the banks) using a REX Agreement type program. Specifically, the program would work as follows:

1. The FHA-RLIP will be authorized to purchase a 50% interest in an REO for $.20 on the $1.00 of the purchase price (reduced by the lender's charges for any legal fees, disbursements, sale fees, and late fees on the mortgage balance) paid by the lender at the foreclosure sale.
   
   
2. The Lender will continue to administer and sell the REO. When the REO is sold, if the sale price will not repay the full 50% FHA-RLIP investment interest in the property, the balance of this 50% interest in the REO not recovered from this REO sale, will carry a REX type Agreement (a junior mortgage lien for a 50% interest in the future increase in FMV of the property over the REO sale price for a 10 year period subsequent to the sale of the REO). At the end of the 10 year period, if the REO property is not resold during the period, the lien will be extinguished.



3. The FHA-RLIP will only be authorized to purchase a limited number of REOs from any one lender over the next two years. The lender upon notification from the FHA-RLIP will submit to the FHA-RLIP a an initial list of REOs with the purchase price info and the present FMV info supported by a licensed FHA bank appraisal using 6 comparable sales.



4. The FHA-RLIP by committee will select for the program from the list a number of these REOs not to exceed 50% in current FMV of the total REOs submitted.



5. The FHA-RLIP will also provide a 75% FHA guarantee to existing home builders building loans (the principal balance on August 1, 2008), for those qualified builder company borrowers that have not been delinquent on any payments to the lenders prior to August 1, 2008. New building loans can qualify for a 50% FHA loan guarantee, providing they have no prior defaulted loans (prior to Auguste 1, 2008). Maximum building loan guarantee for any one home shall be limited to $300,000.
6. Add a tax free capital gain exclusion for the sale of investor residential family properties of $250,000 for the next two years. This will stimulate the purchase of foreclosed investor (rental) residential properties.

This program will provide the lenders with a vehicle to expedite the sale of REOs, which will give some immediate liquidity to the lenders or the assignee holders of foreclosed mortgages in securitized pools. It will also provide a stimulus, stabalization and liquidity to the home building market and the residential rental home market.

2. Using the Theory of Tax-Enomics, provide tax and economic incentives as consideration to Borrowers, Lenders and Assignees of Securitized Mortgage Pools ("Assignees")to restructure and modify existing mortgages on owner-occupied homes in foreclosure or in mortgage default of 2 or more payments as indicated below. The purpose being to make it economically feasible and desirable for the borrowers to enter into the modification agreement and remain in their homes.

Multi family homes up to 4 family would be eligible for this program and the others listed above and below, on a percentage basis of the owner-occupied portion to the rental portion of the residence.

1. If the current appraised value of the owner-occupied residential home has been reduced below the principal balance of the existing mortgages on the property, the lenders or assignees must agree to modify and reduce the principal mortgage balances to an amount not to exceed 80% of the current appraised value. This new mortgage principal balance would be guaranteed by the FHA. Maximum reduced mortgage principal can not exceed $975,000.



2. Only the reduction amount of the mortgage principal (all late fees of any type will be eliminated in the computation) will be sold to the new Resolution Mortgage Investment Trust Fund (RMITF) for 25 cents on the $1.00, which will receive a junior lien against the property under a "REX TYPE AGREEMENT" - a 50% interest in the FUTURE INCREASE IN VALUE OF THE PROPERTY WHEN SOLD or terminated. This junior lien will require no monthly payments and will only mature upon sale or termination. Alternatively, the Lender can keep the junior mortgage lien (REX type agreement) under the same terms as an investment.



3. This lender or assignees will be granted permission for maximum modification administrative fee of $1,000 to be rolled into the new mortgage principal as long as this fee does not increase the new mortgage principal balance above the 80% of the current appraised value.



4. The mortgage terms must be converted to a maximum 40 year fixed rate term mortgage not to exceed 1% above the current prime rate at the time of the agreement.



5. The mortgage would have at least one full month of being interest free to the borrowers and not require any payment until the first of the month, following the first full month following the signed agreement. The lenders will not receive short-term interest under this agreement.

The tax incentives to enter into such agreement for the lenders, or any assignees, would be several part.

1. The entire remaining principal balance (maximum of 80%of the current appraised value) held by the lender or any assignees would be converted to a tax free bond for its new remaining term. This means the income on these mortgage bonds would be tax free to the recipient.
   
2. For each dollar of principal balance of the mortgage loan in foreclosure or in mortgage default reduced by the lender or the assignees, said lender or assignees will be allowed to convert to tax free income on the principal balance of other mortgage bonds held equal to triple the amount of principal reduction.
3. If the lender options to take the junior mortgage lien under the same terms as the RMITF, it will receive a 10 year tax credit of 100% of any capital gain tax received on sale of the property.

The Owner-Occupied mortgage borrower would receive tax and economic incentives, in addition to those listed above, to enter into the mortgage modification agreement, subject to certain limitations.

1. The lender will be required to delete all derogatory credit info from the borrower's mortgage file and notify all three credit reporting agencies accordingly.
   


2. The qualifying borrower(s) who enter into the modification agreement will receive a $20,000 nonrefundable tax credit spread over a ten year period of the agreement. $4,500 in the first year of the agreement, $2,000 in 2Nd thru 5Th years ($8,000), and $1,500 for 6Th thru 10Th years ($7,500). Homeowners have more financial needs in the early years after defaulting on their mortgage.



3. The credits would be nonrefundable. Unused credits could be carried forward thru the 10th year. Any unused credits after the 10th year would expire.



4. If the owner occupied residence is sold during the 10 year period, the remaining unused credits will be permanently extinguished. The incentive is that home owners should stay in their homes during the 10 year incentive period.



5. The used tax credits will carry a deferred tax impact in the reduction on a 2 for 1 basis of up to $40,000 of the taxable gain exclusion, Each $1.00 of credit used will reduce the taxable gain exclusion by $2.00.



6. The reduction in the taxable gain exclusion could be deferred by an investment in a new owner occupied home, if it equals at least 50% of the original home purchase price, including improvements. Homeowners, who need to downsize, should not be penalized for doing so.

3. Increase in tax incentives to stimulate home purchases:
Using the Theory of Tax-Enomics, I propose the following changes in the tax law.

1. A $20,000 Residential Home Purchase Investment tax credit for the purchase of a new owner-occupied residential primary home that would be spread over a 10 year period.


2. Multi family homes up to 4 family would be eligible for this program and the others listed below, on a percentage basis of the owner-occupied portion to the rental portion of the residence.


3. $6,500 in the year of purchase, $1,000 in 2Nd thru 4Th year ($4,000), $2,000 in the fifth year, and $1,500 for years 6Th thru 10Th ($7,500). Homeowners have more financial needs in the early years after the purchase. The incentives have been made to encourage the homeowner to stay in their homes for at least 10 years.



4. The credit would be nonrefundable, but unused credits could be carried forward thru the 10Th year. Any unused credits after the 10Th year would expire.



5. If the owner occupied residence is sold during the 10 year period, the remaining unused credits will be permanently extinguished. The incentive is that home owners should stay in their homes during the 10 year incentive period.



6. The used tax credits will carry a deferred tax impact in the reduction of up to $40,000 of the taxable gain exclusion, on a 2 for 1 basis. Each $1.00 of credit used will reduce the taxable gain exclusion by $2.00.



7. The reduction in the taxable gain exclusion could be deferred by an investment in a new owner occupied home, if it equals at least 50% of the original home purchase price, including improvements. Homeowners, who need to downsize, should not be penalized for doing so.


8. Home Builders will be eligible for a $1,000 Federal payroll tax expense credit for each new home completed (must have a valid Certificate of Occupancy) after the first 60 days from enactment of the legislation. This payroll tax expense credit program will be instituted for a period of one year after the 60 day period.

4. FREE THE RETIREMENT ACCOUNTS - KEOS, IRAS and Corporate Pension Plans.

Under certain 401K plan and Corporate Retirement Plans, a participant is allowed to borrow funds from these accounts , subject to strict limitations, without a tax impact. However this is a loan that requires repayment and the interest is not deductible.The present tax law makes the withdrawal in most cases as economically unfeasible.

In order to make it easier for prospective homeowner-borrowers- to use funds in their retirement accounts for the purchase of a residential home (owner-occupied), I propose using the Theory of Tax-Enomics for changes in the tax laws as follows:

1. If the tax law were changed to allow a withdrawal for a home purchase without current tax impact, the withdrawal becomes an economically feasible and advantageous transaction for the prospective homeowner-borrowers. It allows the borrower to have more equity in his new owner-occupied home, which may represent a significant asset at retirement age. This equates to reduction in retirement asset account from which the funds were taken.



2. The only tax impact would be if the owner occupied home, when sold in the future, would have a reduced taxable gain exclusion.



3. If the taxpayer uses the proceeds within a set-time frame to purchase another primary owner-occupied residence, the reduction in taxable gain exclusion, at the option of the taxpayer can be transferred to the new residence - in whole or in part.



4. The interest on eligible retirement account loans for home purchases should be deductible as qualifying mortgage loan interest, providing it is repaid like a mortgage over a term not to exceed the 65 years less the borrower's age. IRAs should be included in accounts eligible for these permissible "mortgage loans."



5. An allowed administrative fee, not to exceed 1/2% of the interest charged on the loan, which interest income when repaid will go directly back into the participant's retirement account.



6. Modify Qualifying Income for Residential Mortgage Financing to include the nontaxable for mortgage underwriting purposes the nontaxable income earned on retirement tax deferred accounts (which income is not reported on the borrower's tax returns). is a nontaxable income that many borrowers have, that should be used in their qualifying debt to income ratio, that presently to my knowledge is never considered. This income should be reduced by 2.55% (the 10% tax penalty for early withdrawal less the 7.45% payroll taxes that it is not subject to). If the borrower does not have sufficient income to pay his mortgage at any point this additional income is available to the borrower to subsidize his taxable income.

Note: The above programs, in the long-run, will be self-financing with deferred tax impact. Tax Incentives - Tax Credits or exemption from tax are only granted where the participants are doing services for the economy or assisting the economy by stimulating and restoring consumer confidence in the housing market values and residential mortgage financing. In each case the parties must participate financially to get the tax and economic incentives.

We will be forwarding seperately other UPDATED CANDU MEMOS for solutions to many of our nation's crisis problems. All of these solutions have been previously sent by fax and email.

I am trying to serve my country with the tools that I have. Please give me the respect to provide a personal response, even if you disagree with my solutions (but please tell me why if you can).

MRCANDU10 (Cousin of MR.GET-IT DONE)