Neighborhood Recovery Act

Chapter IV: What would President Richard Henry Lee do
about the 2008 Real Estate/Mortgage Crisis?

The title of the chapter “What Would Peyton Do?” is taken from a letter Thomas Jefferson wrote to his grandson declaring that:

I had the good fortune to become acquainted very early with some characters of very high standing, and to feel the incessant wish that I could ever become what they were. Under temptations & difficulties, I would ask myself what would Dr. Small, Mr. Wythe, Peyton Randolph do in this situation? What course in it will insure me their approbation? I am certain that this mode of deciding on my conduct, tended more to its correctness than any reasoning powers I possessed. Knowing the even & dignified line they pursued, I could never doubt for a moment which of two courses would be in character for them. Whereas, seeking the same object through a process of moral reasoning, & with the jaundiced eye of youth, I should often have erred. From the circumstances of my position, I was often thrown into the society of horse-racers, card-players, fox hunters, scientific and professional men, and of dignified men; and many a time have I asked myself in the enthusiastic moment of the death of a fox, the victory of a favorite horse, the issue of a question eloquently argued at the bar or in the great council of the nation, Well, which of these kinds of reputation should I prefer? That of a horse-jockey? a fox-hunter? an orator? or the honest advocate of my country's rights? Be assured, my dear Jefferson, that these little returns into ourselves, this self-catechizing habit, is not trifling nor useless, but leads to the prudent selection and steady pursuit of what is right."[ii]

The following chapter demonstrates, in six different Presidential segments, the heuristic value of this Jeffersonian approach by applying the ethos and wisdom of past 18^th Century presidents to current 21^st Century Challenges: The Real Estate/Mortgage Crisis, States’ Rights, The Global Market, The National Debt, Energy Independence and The Health Care Crisis. This is an exercise that the author has thoroughly enjoyed.

Richard Henry Lee of Virginia was elected President of the United States, in Congress Assembled on November 30, 1784 and served until November 22, 1785. He was the third son of a Thomas Lee, the "empire builder," who as the 5th son of Richard Lee "the emigrant", the largest Virginia landowner at the time of his death.

Richard Henry Lee's Presidency was a busy one, attending to the needs of the new nation. Lee's candor and straightforwardness bore few secrets. In a November 18, 1784 letter to Samuel Adams he wrote, "I shall be extremely happy to be aided by your counsels during my residence in Congress." [iii] Richard Henry Lee's letters are abundant and well-published and consequently we know that President Lee favored funding the staggering national debt ($6 trillion in today’s dollars) with foreign loans while the Northwest Territory’s land (Ohio, Indiana, Illinois, Michigan, Wisconsin and Minnesota) were prepared for sale. Lee, in fact, reviled import duties and was a staunch opponent of Congress' willingness to tax the citizens at the Federal level.

As President, Richard Henry Lee learned that borrowing more foreign money was no longer an option due to the weak dollar and the government’s inability to pay even the interest on its current debt. His only option, other then taxes, was the enactment of an Ordinance for the Northwest Territory that would settle the state territorial claims over the vast lands. If passed these unencumbered federal holdings, Lee reasoned, would provide the United States government with seemingly limitless land to sell. Lee wrote to his friend and colleague Samuel Adams on May 20th:

I hope we shall shortly finish our plan for disposing of the western Lands to discharge the oppressive public debt created by the war & I think that if this source of revenue be rightly managed, that these republics may soon be discharged from that state of oppression and distress that an indebted people must invariably feel [iv]

President Lee was successful in obtaining the enactment of the Land Ordinance of 1785 which set aside a test tract of land in the Northwest Territory for real estate development. [v] The federal surveyors divided the land into carefully planned individual square townships. Each side of the township square was to be six miles in length containing thirty-six square miles of territory. The township was then divided into one-square mile sections, with each section receiving its own number and encompassing 640 acres. Section sixteen was to be set aside for a public school and sections eight, eleven, twenty-six, and twenty-nine were to provide veterans of the American Revolution with land as payment for their service during the war thus greatly reducing the war debt. The government would then sell the remaining sections at public auction at the minimum bid of 640 dollars per section or one dollar for an acre of land in each section.

The federal land that was not in dispute by the Native Americans was eagerly occupied by western settlers as squatters as they had little respect for the authority of the United States, in Congress Assembled which at the time was the governing entity of the United States of America. [vi] The settlers were correct in their assessment as the federal government failed to muster the capital necessary to pay magistrates and troops to enforce the $1.00 per acre fee. With the States no longer in control of the lands and a weak federal government floundering in debt, the tide of western squatters flowed into the Northwest Territory. Richard Henry Lee’s plan to fund the federal government from western land sales imploded and no capital flowed into the federal treasury from the western lands. The survey system would expand, however, from this small range in Ohio to the Pacific Ocean and later into Alaska as the United States expanded its borders during the next two centuries. Future Presidents would utilize Lee’s system and fund government projects, public education, railroads, interstate highways and national parks through land sales and swaps throughout the 19^th and 20^th Centuries. Lee's plan was prophetic but like most visionaries he was ahead of its time.

At the end of his presidential term Lee returned to Virginia and remained active in state politics until 1787 when he was re-elected to the Confederation Congress as a delegate. Lee voted to revise the Articles of Confederation resulting in the convening of the 2nd Constitutional Convention. The convention was chaired by George Washington who agreed with Delegate James Madison and other key founders to discard the Constitution of 1777 completely and form an entirely new plan for the federal government. The new plan was signed by Washington and the other founders on September 17, 1787. When the new constitution was reported to congress on September 20th, Richard Henry Lee vehemently opposed its adoption. Despite this and President Arthur St. Clair's disappointment in the document's complete dismantling of the Articles of Confederation, the new constitution was sent to the States for ratification without any modifications by the United States in Congress Assembled. In an October 1787 letter to George Mason, Lee warned that the new Federal government would "… produce a coalition of monarchy of men, military men, aristocrats and drones, whose noise, impudence and zeal exceeds all belief". [vii] As President, Lee had summed up his philosophy to Samuel Adams in a March 14, 1785 letter two years earlier stating:

I think sir that the first maxim of a man who loves liberty should be, never to grant to Rulers an atom of power that is not most clearly and indispensable necessary for the safety and well being of Society. [viii]

Richard Henry Lee was the only true "radical" to win the Presidency of the United States of America, in Congress Assembled. To his dismay the new executive departments had weaned away the power of the his office to a shadow of what it was when Samuel Huntington became the first President of the United States under the Constitution of 1777 in 1781.

The Question proposed by this author is: What would President Richard Henry Lee Do regarding the current real estate/mortgage crisis? In 1992 this author, as the President of RE/MAX of Pennsylvania n/w [ix] published a white paper that was widely distributed throughout the Keystone State. In point 12 of my work I wrote:

The white paper, entitled Uncommon Sense, caught the eye of President George H. W. Bush and this author traveled to Washington D.C. to meet with the administration’s economic policy advisors. President Bush lost his re-election bid to William Jefferson Clinton in 1992. The economy strengthened and Capitol Hill lost any appetite for revising the tax code. The residential mortgage time-bomb just kept on ticking despite numerous attempts, including a run for the U.S. Senate, made by the author to disable the trigger.

“Klos also warns that the trend of millions of homeowners utilizing home equity credit lines to pay off short term consumer debt could thrust America into a depression. "Consumers are being enticed into saddling their homes with enormous debts to obtain an interest tax deduction for cars, credit cards, and other consumer good," he explained. "Should congress fail to correct the current tax law, the economy will continue its downward trend," he continues, "the jobless recessive trend will climax when home-owners begin to default on equity mortgages instead of credit card and car payments. Our country could be faced with millions of Americans loosing their home because of over-extending prompted by aggressive home equity and mortgage lending." - Pocono Record, January 25, 1992 “RE/MAX head offers Bush a recovery Plan”

What was formally proposed in 1992 (above), 1994 (as a U.S. Senate GOP Nominee), 2000, and 2004 and again in 2008 (as an Exhibitor of rare historical documents at the GOP National Convention) was the rejoining of investment real estate with equities by moving it into the portfolio federal tax category while capping residential mortgage deductions to 80% of the initial purchase price of a primary and secondary residences. Additionally, this author sought an easing of loan regulations not to bolster single family ownership but to enable entrepreneurial families to readily acquire and renovate mixed-use owner occupied buildings. Small businesses, I maintained in 1992, “… are the financial back bone of the American economy.” These measures, I purported, “… would enable small businesses to start-up and/or expand their ventures by encouraging investment in owner occupied real estate whose losses could be offset from portfolio tax category gains.” Uncommon Sense also maintained that providing “owner occupied loans” with tax incentives for mixed use building acquisition would result in the reestablishment of entrepreneurial families in the town centers all across America reducing urban sprawl.

Today, many U.S. real estate markets face mortgage challenges even greater then those conquered in the Great Depression. Like the 1930’s, struggling homeowners with little or no equity are finding relief from beleaguered financial institutions who are unable to sell foreclosed homes to liquefy their mortgage assets. Like the 1930’s struggling homeowners, with plenty of home equity, find themselves harassed by creditors as the lenders know their losses can be recouped by Sherriff Sales. In other words overextended mortgage homeowners are granted relief as lenders have no other financially sound options. On the other hand, financially challenged homeowners who did not over leverage their homes face hasty foreclosures. Financial institutions need cash and it is easily mined from the liquidation of equity rich real estate of non-liquid homeowners. President Richard Henry Lee, I am sure, would quickly seek legislation to correct this practice. But what would he do about the current oversupply of residential real estate and the overflowing REO portfolios?

This is not the first time things have been tough in marketing real estate. In my three decades of experiences as a real estate preservationist [x] there have been unbalanced markets stifling the American economy. In the 70’s it was the interest rates (James Earl Carter Administration). In the 80’s it was the author’s local economy (Pittsburgh manufacturing). In the early 90’s it was mortgage money unavailability to meet baby boomer demands seeking larger and more prestigious single family residences. Today it is the collapse of artificial value precipitated by aggressive Wall Street lending artfully designed to capitalize on the home mortgage tax deduction. Together, along with baby boomer greed, this “tax deductible easy money mix” led to imprudent home equity leveraging and wild residential real estate speculation. The end result is a large inventory of residential homes primarily built to flip. These are homes that the boomers no longer want and their children can not afford hence depreciation and deterioration. So how does one market such an albatross of inventory in a wary lender market? What would President Richard Henry Lee do?

Realtors had their selling challenges in unbalanced markets before. They also had seen mini-revolutions in their industry with franchising, then the MLS, then the real estate 100% agent commission concept, and now the internet For Sale By Owner phenomenon. Outside of these marketing examples, the real estate trade industry and its markets has not changed much since the Great Depression. Today, Realtors can no longer (and never really could) justify a $60,000 commission on a million dollar house. The era of large houses and big commissions is over. Baby Boomers are more inclined to have two small houses in different parts of the country and migrate with the seasons. Real estate offices will slim down to FedEx-Kinko models and work at www speeds doing more transactions per person with fewer people in fewer offices. The decade of the 10’s will usher in real estate warehouse shopping where 4000 square foot plus homes will deteriorate, due to dwindling demand and energy costs, much like the old Northeast mansions did in the 60’s and 70’s.

So here we are, September 17, 2008, and the single family home mortgage deduction with no other real estate tax incentives failed miserably to protect America’s foundation of prosperity, home equity. In the end the 1986 Tax Law created an artificial value bonanza for mortgage lenders who concocted little or no money down financing schemes that lured citizens into large homes, at adjustable interest rates with promises of appreciation in the growing economy. We are all, especially those in finance, real estate and politics, culpable. So, given these parameters, what would President Richard Henry Lee Do?

President Lee was not a believer in intrusive government. In fact, President Lee preferred a weak central government believing privately held real estate, like politics, should be left under the control of state and local entities. Richard Henry Lee would, therefore, look to local and state leaders to brainstorm their way out of the current mortgage crisis except that it is a product of federal tax policy. President Lee would understand that the 1986 federal tax act and the government’s unwillingness to regulate the unprecedented home mortgage lending bonanza created the current crisis. Lee also understood that men instinctively insure their own survival by acquiring the rudimentary elements necessary for food, shelter and clothing. Lee and the other founders knew that this inherent nature of man fostered the burning desire to acquire land as real estate provided the boundless opportunities to satisfy the most fundamental physiological needs of citizens in a free society. This author believes Lee, had he been faced with the current income tax system, would have never separated, in the tax code, the quintessential investment of real estate from stocks, bonds, commodities and other equities.

For over 20 years former Secretary of the Treasury Donald Regan, an author of the 1986 Tax Act, and his Wall Street successors have inartistically manipulated real estate markets with its commercial loans, home mortgage inventions, REIT’s and other investment products that were designed to be packaged and traded as equities. Clearly, they have failed in their real estate directorship and it is time to turn real property back over to Main Street and amend the Tax Act of 1986. This author’s offers the following six step proposal as a “Neighborhood Recovery Act” to reverse the mortgage and real estate bear market trends:

First: Move residential real estate gains and losses, (one to 4 family units) into both the ordinary and portfolio tax categories for properties that are acquired in the next 24 months by anyone including partnerships, LLCs and corporations. Result: Investors and investment entities will start acquiring residential real estate in a soft market as artificial value (prices higher then the cost of the land plus cost to build) has already dissipated since one can’t build many houses at their current asking prices let alone recapture the value of the land.

Second: Any residential real estate acquired in the two year period would remain in this new deducible income tax state for the life of property ownership by the investor or investment entity. Result: Investors and investment entities will hold the real estate (limited flipping) as the non-expiring tax deductions make long term ownership very attractive. A balance market will emerge as investors and investment entities acquire residential real estate at what I believe will be unprecedented levels (two years might be too long).

Third: once the two year period has expired investment real estate gains and losses are to be permanently shifted into the portfolio tax category. Result: Real Estate will be on an equal footing with stocks, bonds, commodities and other equities resulting in diverse investment portfolios managed by both Wall and Main Streets.

Fourth: Primary and secondary residence mortgage interest should only be deductable for loans up to 80% of the original value of the initial acquisition value. Result: This will retain the incentive for citizens to acquire homes while thwarting borrowing on home equity beyond 80% of the original acquisition price to take advantage of the interest tax deduction..

Fifth: Tax Credits should be issued as incentives for entrepreneurial families to purchase mixed-use buildings to expand their businesses and raise their families. Result: This measure will result in entrepreneurial families relocating out of the suburbs and into cities revitalizing urban centers while checking suburban sprawl.

Sixth: Repeal FASB 157 mark to market accounting and relax regulations to provide time for financial institutions to liquidate assets to meet cash requirements. Result: The repeal of mark to market accounting will provide financial institutions with an accounting system favorable to a declining real estate market will foster a stabilization of the financial markets which in turn will help in the stabilization of the real estate markets. [xi]

The real estate market will continue to depreciate unless the tax code is changed as outlined above. Congress needs to unleash the private sector, while it still has money.

There has been an average loss of about $60,000 per unit from Jan. 1, 2007 until April 1, 2008 or $5.43 trillion in equity losses in Over Leveraged detached single family homes:

**These figures come from the 2007 American Housing Survey (AHS) [PDF], a useful information source on the quality of housing in the United States. Statistics are provided for apartments, single-family homes, manufactured housing, new construction and vacant housing units.

One can add to this $5.43 trillion in equity losses another $1 trillion in other residential real estate losses (townhomes, condos etc ...). We are at $6.43 trillion in citizen home equity losses nationally.

The oversupply of Residential houses must be liquidated now utilizing free enterprise by a change in the tax code to turn this depreciation into appreciation. Another 25% of equity losses (as opposed to a conservatively speaking a 10% equity recovery) by homeowners will surely collapse the financial system of the United States sending us into a deep depression.

This author believes that injecting $700 billion in cash, as proposed by the Bush Administration, is a recipe for disaster without meaningful real estate market corrections as noted above. The proposed bailout act, as proposed, is merely a Wall Street Welfare handout aiding savvy investors who misused capitalism. The providing of unprecedented taxpayer funds to save their failing companies is unacceptable when market solutions abound with adjustments in the 1986 Tax Code. Capitalism on the way up and socialism on the way down is a dangerous message to instill into our youth in this free society.

If passed, the 700 billion dollar bailout package will result in much greater crisis two or three years down the road (if it lasts that long). Any delays in enacting a free market solution to the current real estate market crisis will compound the problem. Be assured that if enacted, corporations will misuse the funds and millions of beleaguered and newly angered homeowners will seek their share of the $700 billion in government subsidies to compensate them for their equity losses. It is, therefore, imperative that a market solution be adopted immediately to greatly reduce the residential real estate inventory of this unprecedented seller’s market. Be forewarned that this real estate/mortgage crisis must be reversed quickly by free market forces. There are 78 million baby boomers aging at a break neck pace and health care is the next Herculean challenge that is already devouring 24% of GDP in the current national budget.

The People of the United States of America can not afford $700 billion dollars to be squandered on a Wall Street bailout when a very simple change in the 1986 Tax law will unleash entrepreneurial market forces that will naturally reverse the oversupply of residential real estate all across America.

What would President Richard Henry Lee do? This is a difficult call as back in 1785 income tax, let alone its complex bracketing system, was unconstitutional in both the 1^st (1781) and 2^nd (1789) U.S. Constitutions. This author would wager that President Lee would be inclined to eliminate the entire income taxing system by calling a third constitutional convention. At this convention he would probably favor the replacement the complex income taxing system with a simple national sales tax. This is fairly far reaching speculation. This author, however, is 100% sure that Richard Henry Lee would insist on the proper management and disposition of U.S. Federal Real estate holdings as the Presidential signer of An Ordinance For Ascertaining The Mode of Disposing Lands In The Western Territory.

President Lee viewed federal land as a resource to be utilized to fund the government and retire the Revolutionary War debt. He did not approve of foreign loans and taxing the people of the United States to eliminate debt or subsidize the government. Lee would see the current decade’s closing and sale of U.S. Military bases and forts as opportunity for the federal coffers. This practice was nothing new to Lee or the Colonists as the first widespread closing and downsizing of forts occurred just after the British expelled the French from North America in 1763. The surplus land and buildings were sold then, much like today, to the highest bidders. The U.S. Military is not alone in its land liquidation. For instance, from 1998 to present the U.S. Bureau of Land Management conducted real estate sales on numerous large desert parcels in the Las Vegas, Nevada marketplace. The result was considered, by most real estate experts, a huge success netting unprecedented prices for BLM desert property. Richard Henry Lee, I believe, would have seen these sales as an opportunity lost.

As a visionary and real estate entrepreneur Lee would hold that 21^st Century BLM, Pentagon and other federal property sales are as shortsighted and archaic as his Western Land Ordinance of 1785. Today, Lee would call for a much sounder real estate liquidation model, Land Leases. Bill Gates didn't sell MSDOS to IBM, he leased it, and now the company dwarfs Big Blue. China didn't sell Hong Kong to the British, they leased it, and now they have inherited one of the world's most vibrant cities. Lee would quickly grasp this and under his administration all future federal real estate transactions would be 21^st Century Land Leases.

Long-term land leases would net the federal government capital windfalls while alleviating the nation of costly maintenance and repair of vacant federal buildings and property. Most importantly, after 50 or 60 years the improved real estate would revert back to the United States to be leased again, returned to military use or set aside for other public purposes. The possibilities of public reuse of the land are endless for future generations. Additionally, the monthly or yearly leased cash flow would generate steady income for the Pentagon, BLM or National Park Service while their real estate holdings are improved for future federal use.

Moreover, Lee would capitalize on the land leasing opportunities surrounding the federal government interstate road systems. The acquisition or use of existing interstate real estate can be profitably set aside for expansion by leasing “Interchange Land Parcels” to retailers, restaurants, oil companies and real estate developers. Lee, I believe, would also invest a portion of the land lease proceeds in long-term contractor road and bridge maintenance agreements. Preventative contractual road maintenance would extend the life of the nation’s infrastructure minimizing costly re-construction.

Richard Henry Lee, this author is sure, would implement land lease policies on a national scale to reduce taxes, retire the national debt and provide funds for real estate preservation if he was a 21^st Century President of the United States.

Stanley L. Klos

Ste 211 | 678 Alderman Rd | Palm Harbor, Fl 34683 | tel: 727-771-1776

stas.klos@gmail.com | www.ROI.us | stan@johnhancock.org

Start your search on Neighborhood Recovery Act.

About Us