Chris Cook on asset-based finance to the rescue of the housing crisis

Chris Cook of put together a very insightful presentation on how to stop the real estate crisis by switching from our secured debt-based housing financing to a new form of equity-based housing partnerships. If I understood his comment correctly, his point is that 70% of our money is secured on assets and this is the big problem right now (we can deal with the unsecured debt later used in our economy, which could be replaced by a community currency).

His solution, as I understood is, is to break the vicious circle of owners/developers having to sell properties at fire sale prices because they can’t pay back their debt. It consists in:

  1. placing the house(s) in a pool
  2. renting them at a low price to occupier(s), based on a highly-reputable rental index
  3. having them managed by a manager paid as a % of the rentals

Then the magic happens as follows:

  1. New investors interested in steady highly predictable revenues (ex. pension funds) buy shares in the pool
  2. the proceeds are used to pay bank distressed owners/developers, who can pay back distressed banks
  3. occupiers can pay more than their rent and automatically become investors
  4. as they become occupier-investors, they have incentive to invest sweat equity in maintaining homes
  5. they may end up paying their own rent from the rental they get as shareholders, thus breaking the slavery of debt

This equity model is different from a corporation since there is no debt/leverage that would maximize temporarily the management fees by increasing and underestimated risk, which ends up in bankruptcy when default happens. It is similar to a Royalty Trust used for oil production.

Here is the complete presentation: