The Holdsman Scheme for stabilizing personal and national housing finance in Australia
A kinder and more efficient alternative to mortgage loans --
A way of avoiding house-market crashes like the GFC
David Noel
<davidn@aoi.com.au>
Ben Franklin Centre for Theoretical Research
PO Box 27, Subiaco, WA 6008, Australia.
This article describes a new approach to how purchases of houses by residents may be financed, with notes on the effects of the scheme on governments, money managers, and society in general.
About buying and owning a property
Most purchasers of houses for their own use, in Australia and elsewhere, finance the purchase through a mortgage. A mortgage [1] is an agreement by which a Borrower is lent money by a Lender for the purpose of buying a property, with the property forming a security for the loan.
Figure 1. The conventional mortgage agreement
In most cases the Lender is a financial institution such as a bank, but other organizations (such as life insurance companies), and sometimes individuals, may also act as Lenders. Borrowers are typically the person or persons who intend to live on the property as their home, usually individuals, although properties for investment are also commonly bought by companies.
In Australia, each property is defined by its Title Deed, which states where the property is located, its size and shape as laid out on relevant government maps, and the name of the owner or owners (typically, the Borrower). On granting a mortgage, the Title Deed will be annotated with the name of the Lender and some details of the mortgage agreement (this prevents the owner from selling the property without the Lender knowing).
A Title Deed will state the class of ownership (usually 'fee simple', meaning normal freehold ownership) and, if more than one Owner is named, their relative entitlements to the property. Normally a husband and wife will be registered as 'joint tenants', in this case the property is owned by them jointly (as a sort of composite person) and neither can sell their individual part. If there are several joint tenants and one of them dies, their share in the property passes automatically to the survivors.
The alternative to 'joint tenants' is 'tenants in common'. In the latter, the proportion of the property owned by each owner is specifically stated, for example 'one-ninth' or 'two-thirds'. In theory, a tenant-in-common may sell or otherwise deal with his share independently of the other owners, although there are practical limitations to this.
Housing finance in the wider economy
In the wider scheme of the economy, money invested in houses is a significant part of the net worth of a country or state. In the terms used in my book Matrix Thinking to describe how a society works, ownership of houses is an important form of the Infocap or value-substance of a modern country-syston [2]. Of course its importance varies from society to society, in the English and American tradition personal ownership of a house is a valued and encouraged thing. On the other hand, in some countries the majority of people rent their accommodation, or use state-provided housing.
The existence or otherwise of house-ownership infocap can have a major influence on a national economy, and this influence may itself be skewed by demographic changes and even fashion in economic ideas. For example, the value of his house may be equal to 10 or 20 times the owner's annual income, so if he pays it off over a 40-year working life, at retirement the house represents over 25% of his entire lifetime earnings.
Suppose that a typical citizen just reaching retirement has paid off, from scratch, a house worth one million dollars (this is close to the real case in Australia). Add up all the equity held in their houses by all the population, and this sum (the 'house-ownership tranche') may be a major brick in the national-economy structure.
In practice, housing stock held in government or commercial hands may behave quite differently to exactly the same stock if held by house owners. Motivations and responses to personal events may be very different.
For example, if parents owning a house die, the house will often be left to their children or other relatives, whose personal finances may be greatly altered by this event. With non-occupier-owned houses, assets owned are not changed, and business goes on as usual.
Of even greater importance are the mortgage agreements relating to privately-owned houses. The whole field of house mortgage lending figures very large in a country's economy, and may be vitally affected by changes in the marketplace and confidence in the economy.
This matter was at the root of the recent GFC, the Global Financial Crisis. In the USA in particular, immediate lenders bundled up mortgages and on-sold the bundles to other financiers, often without regard to their underlying value and stability. When mortgage values were queried, banks and other mortgage lenders were swept away in a huge loss of confidence in the value of the mortgages, and several major economies crashed, leaving people without jobs.
Job losses immediately affected the ability of borrowers to make payments on their mortgages. Lenders widely foreclosed on their mortgages, forcibly terminating the mortgage agreements, and leaving the lenders the owners of devalued properties which could not be quickly re-sold. Borrowers' financial situations were cruelly devastated. In the USA, where mortgage conditions are different, thousands of borrowers just walked away from their properties, returning their house keys to the banks. Family economics became a wasteland.
The Holdsman Scheme proposed here side-steps most of the problems in the conventional mortgage financing situation, and greatly improves personal, national, and international housing stability. It also has further consequences, mostly favourable, for the whole range of economies.
How the Holdsman Scheme works
In the Holdsman Scheme, two types of player are active. Neither are borrowers or lenders.
One player is the Holdsman. The Holdsman is an individual corporate entity, set up for a particular property by a government. Each Holdsman is identified by a name, perhaps consisting of letters indicating the government involved, plus a running number and a check digit. Examples might be 'Holdsman AU782655Y', for an Australian Government Holdsman, or 'Holdsman WA93178Q', for a West Australian government corporate entity.
The other player is the Indweller. The Indweller is one or more real persons, identified by their real names.
Here is the novel part of the Holdsman scheme. When a property is bought using the Holdsman Scheme, the Holdsman and Indweller concerned are registered as joint tenants on the title deeds.
Corporate entities commonly figure on title deeds, sometimes there may be more than one corporation, with their respective shares noted, as tenants in common. There may even be a mix of corporate and real owners, with recorded shares in a property.
But the combination of a real person and a corporation are virtually never recorded as joint tenants. Recall that joint tenants own a property as a joint entity, without shares or specified percentage interests in the property. And that if there are more one real persons in a joint tenancy, and one of them dies, the property passes to those that are left, without any change to the title deeds. If a joint-tenant owned property is sold, all the owners must agree and each must sign the sales agreement.
Since a corporate entity is potentially immortal, Holdsman Scheme ownership without a controlling Holdsman Agreement would lead to the situation where the Holdsman involved would just have to wait for all the Indwellers to die, to gain control of the property. For the Holdsman Scheme to be workable in the real world, each property involved would need to be subject to a Holdsman Agreement.
Here are clauses which would be essential or typical in such an agreement:
1. At least one of the Indwellers must live in the property as their normal home at all times (in Australian law, that would be their 'Principal Place of Residence').
2. The Indweller is responsible for maintenance, upkeep, insurance, and all ongoing expenses relating to the property.
3. No person recorded as an Indweller can figure as an Indweller in any other Holdsman Agreement.
4. The relative interests of Holdsman and Indweller are ascertainable, from one time to another, by reference to the property's ShareBar account. This account is a guidance instrument in operation of the Agreement, and not of relevance to the title deeds.
Figure 2. The ShareBar near the early part of a Holdsman Agreement
Figure 2 shows a graphic of how the ShareBar might look in the early years of a Holdsman Agreement. The two parts, the Holdsman Bit and the Indweller Bit, represent the two parties' proportional interest in the property at the time of looking. These proportional interests are not their relative ownerships, the property is owned by the combined Holdsman plus Indweller entity.
Between the two Bits is the Wall. The Sharebar Wall will move continuously during the operation of the Agreement, that is, until the property is disposed of.
When a Holdsman Agreement is first set up, that is, when a property is first bought, the position of the Wall will reflect the relative amounts of money put in by the Holdsman's owner (a government) and by the real-person purchasers (normally, the Indweller). So if the property costs $1,000,000, the government puts in $850,000, and the Indweller $150,000, the Wall will sit initially at the 85% mark. The length of the bar will be fixed at 100% and keeps a monetary value as at the time of purchase, $1m in the example.
Thereafter, the Wall will move each day according to what the parties do. Each calendar day, the Wall will move to the right by an amount exactly equivalent to 5% per year of the Holdsman's Bit. This amount can be called the Increment. It will be equal to 5% divided by 365.25 (number of days in the year), that is, about 0.00013689254.
So on a day when the Holdsman Bit stood at exactly 85% of an initial ShareBar of $1m, the Wall would shift to the right by about $116.36 (if my maths is correct).
The Wall would shift to the left, diminishing the Holdsman Bit, whenever the Indweller transferred money into the account. The total ShareBar value of $1m would remain unchanged. Indweller pay-in, and application of the daily increment, would be the only actions changing the position of the Wall
The actual account receiving pay-ins would be extremely simple to operate, it could exist as an online account, perhaps tied in with a government bank, a post office Giro, a special Holdsman Bank, or similar facility.
The effect of this arrangement to the Indweller would be as if they were paying off a loan at 5% interest. To the government owning the relevant Holdsman, it would be as if they were lending out money at 5% interest. Administration costs for the account would be negligible. For both parties, this arrangement would usually be more favourable than that involved in typical commercial arrangements. The 'interest rate' is always set at exactly 5%, for reasons which will not be gone into here.
More Holdsman Agreement clauses:
5. The Wall between the Holdsman Bit and the Indwellers' Bit of the ShareBar will move to the right each day (increasing the Holdsman Bit) by the equivalent of 5% per annum of the proportion of the Holdsman Bit on that day.
6. The Indweller can move the ShareBar Wall to the left (decreasing the Holdsman Bit) by transferring money into the relevant Holdsman Account.
Selling the property
If the property was to be sold, with the agreement of both Indweller and Holdsman, then the sale proceeds would be divided between the parties according to the position of the ShareBar Wall on the day of sale.
For example, if the Indweller had paid in enough to move the Wall so that the Holdsman's proportion was down to 20% (as in Figure 3), and the sale price of the property was $1,600,000, the Holdsman would receive $320,000, and the Indweller would get $1,280,000.
Figure 3. The ShareBar towards the later life of a Holdsman Agreement
This outcome is quite different to the situation where a property subject to a mortgage loan was sold. There, the borrower would retain the total sale amount, less the actual amount (if any) still owing on the mortgage. Under the Holdsman Scheme, both the government owning the Holdsman and the Indweller would benefit proportionally from increases in house values. The benefit to government would therefore be greater than they would get by lending out money at 5%, as long as house values increased.
The number of persons listed as Indwellers would be fixed at the beginning of the purchase, when the title deeds were registered. The same considerations apply as for any property purchase. If not a sole purchaser, the most common situation might be husband and wife, sometimes other forms of domestic partnership, occasionally a widower and his unmarried daughter. All would be joint tenants with the Holdsman.
With two or more real persons as Indwellers, the normal inheritance laws would apply -- interest in the property would pass automatically to the remaining survivors. With the death of the last Indweller, a clause of the Holdsman Agreement would come into effect: the Holdsman would sell the property, and the Indweller Bit of the proceeds would pass to the last survivor's estate.
Because of the requirement that at least one Indweller must reside in the property, if a resident Indweller died and a second or third, non-resident, Indweller existed, one of the surviving Indwellers would have to take up residence within a given grace period, say one year. In default of this, the Holdsman would be required to sell the property and pass on the Indweller Bit of the proceeds to the survivors.
More clauses:
7. If the property was disposed of, for whatever reason, the proceeds would be divided among the Holdsman and the Indweller according to the position of the ShareBar Wall on the day of sale.
8. If the last Indweller was to die, then the Holdsman would sell the property and pass the Indweller share of the proceeds on to the Indweller's estate.
So far, nothing has been specified as to the manner or rate at which the Indweller would transfer money into the ShareBar account. This matter would be far more flexible than in the case of mortgage repayments, which are normally tightly defined as to interest rate and terms of payment, for example 7.5% of the outstanding balance, or a specified money amount, payments to be made monthly.
If the borrower should not make payments as specified by the lender, and even then in some other circumstances, the lender has the right to 'foreclose on the loan', seizing and selling the property. Under usual British and Australian mortgage agreements, if the net proceeds of sale are less than the amount owed, the borrower is required to pay the difference to the lender out of his own funds.
Conditions in a Holdsman Agreement contract are much more flexible. It is obviously in the Indweller's interests to move the ShareBar Wall to the left as quickly as they can, so that the daily Increment movement to the right is smaller. While the Agreement might set up target rates of payment, default on these rates could not trigger anything similar to foreclosure, because the Holdsman and the Indweller are joint tenants.
So while steady progressive payments by the Indweller might be the norm, in some circumstances they might not be appropriate. Suppose the sole Indweller lost his job or could not make regular payments for another reason. The only effect on the Agreement would that the ShareBar Wall would move to the right at its normal pace, without a countering left shift.
If the Indweller won a lottery, or was left money, they could pay it into the Holdsman Account and give the Wall a big shift left. If the Indweller had to retire before his Bit had reached 100%, they could just cease payments, operating similarly to a reverse mortgage.
In all cases where a property was disposed of, after all transfer work had been done, the government would just terminate the Holdsman (close the corporate entity down). Where the Indweller had paid out all the Holdsman Bit, the Holdsman would be similarly terminated. The Indweller would be a surviving joint tenant, and would automatically 'inherit' all rights in the title deed without special action.
Obviously the Holdsman Agreement would have to allow for circumstances where the Indweller Bit had shrunk below a certain level. If the Indweller Bit fell below 10%, and they made no action to shift the Wall leftwards, then the Indweller share would fall to zero in about 2 years. Therefore, most Holdsman Agreements would probably specify that the Indweller be formally notified when their share fell below 10%. If the Indweller ignored this fact, and the Indweller share then fell to 5%, a Holdsman Agreement clause would come into effect by which the property would be sold, any residual Indweller share would be given to them, and the Indweller would have to vacate.
More clauses:
9. If the Indweller paid out all the Holdsman Bit, the government would just terminate the Holdsman (close the corporate entity down). The Indweller would be a surviving joint tenant, and would automatically 'inherit' all rights in the title deed without special action.
10. In all cases where a property was disposed of, after all transfer work had been done, the government would just terminate the Holdsman. No Holdsman Agreement could be transferred to another party.
11. If the Indweller Bit fell below 10%, the Indweller would be formally notified of this, and warned that a further fall to 5% would mean that the property would be sold and that they would have to vacate the property.
Direct implications for Indweller and Holdsman
The Indweller would be in a position where they in effect had a fixed 5% loan from the government which they could pay off at a rate and under conditions they could choose, provided they had at least a 10% share in the property.
The Holdsman (and its owner, the government) would in effect be lending money out at a fixed rate of 5%, and in addition it would share in any increase in the value of the property. With the Holdsman present as a joint tenant, this 'investment' would be very safe.
For the Indweller, this would be a far more attractive position than under current mortgage-loan conditions. The constant worry about 'interest rates increasing', with increased monthly payments demanded, would disappear. Housing loans at 5% would be regarded as very attractive, at the very bottom of contemporary housing interest rates.
The Indweller would also be cushioned against unforeseen circumstances, such as job loss, which might prevent them making regular payments. An Indweller who had built up their share in a property to 80% would see the ShareBar Wall move right at only 1% per year of the ShareBar total, if they ceased payments. While compounding would increase this rate, they might still have a further 50 year run before their share fell to a dangerous level.
Implications for government and society
The Holdsman Scheme is a much more efficient way of financing housing than any mortgage lending scheme. Mortgage lenders sit as middlemen between sources of finance and borrowers, and typically charge at least 2%, sometimes much more, for their part in the operation. They have no counterpart in a Holdsman Scheme, so the housing finance sector would be at least 2% more efficient if they were eliminated.
The Holdsman Scheme is also far more flexible and kinder to houseowners, who would avoid the stress and expense of foreclosures if they did not match the lenders' repayment requirements. House buyers would not have to worry about increasing interest rates.
A really big bonus for governments, and society in general, is that if the bulk of home properties were financed through Holdsman Schemes, the tragedies of loan foreclosures, leading to job loss and general loss of business confidence, would be eliminated. The recent Global Financial Crisis just would not have occurred.
On the moral side, the advent of the GFC has been blamed on lender practices which have been claimed as, at best, unscrupulous, and at worst, downright fraudulent. Such practices would be eliminated along with the mortgage paradigm. Not only housing finance, but national economies in toto, would become much more stable -- this is surely desirable.
Other consequences
It would not take Indwellers long to realize that they could finance personal buys cheaply and simply by withholding payments into their Holdsman Account until they had accumulated enough for their other purchases. Instead of taking out expensive personal loans to buy a car, boat, or furniture, Indwellers would effectively borrow from themselves at only 5%.
Facing their effective longer-term elimination, banks and other lenders of housing finance can be expected to put up a fight, even generating spurious claims about Holdsman Schemes. They might say "The Government has to find all this extra money, sucking it from other areas of need".
In actual fact, little extra money would need to be found, because every outlay on a Holdsman Scheme would immediately start to be paid back, with interest. Nor would a change happen rapidly. Many mortgages currently in place have lifetimes as long as 35 years.
Astute financiers would recognize the advantages to them, rather than the downside, and would look to such areas as offering funds to governments to help set Holdsman Agreements in place.
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References
[1] Wikipedia. Mortgage Loan. http://en.wikipedia.org/wiki/Mortgages.
[2] David Noel. Matrix Thinking. http://www.aoi.com.au/matrix/MT.htm.
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