An alternative to bank mortgages can make energy efficient homes affordable. by greencanary

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Pitch

Energy efficient building technology is abundant but unaffordable with bank financing. Local interest free financing can make it affordable.

Description

Summary

For the past 5 years I have become obsessed with the potential benefits of the distributed production of biochar from locally  sourced biomass. 

Despite my belief in the promise of biochar and all the other promising technologies nothing is happening, primarily because of the interest bearing bank mortgages.

Currently the US national residential mortgage debt stands at $10.834 trillion.  The total bill for interest and fees this year alone will be well in excess of a half a trillion dollars.  

What makes the problem far worse is that when the principle is paid, it vanishes into thin air from whence it was created, the same way it vanishes when the borrower defaults on the loan. See reference #5.

Meanwhile the interest paid does not vanish into thin air, but does vanish from the community along with the local jobs and most of the income of the residents.  Most of the interest that is paid goes to the 1% who respond by denying climate change science and then refuse to pay any more taxes to subsidize building of energy efficient homes.

The average home buyer will own the home for only 7 years and will not have paid back enough principal to even cover all the closing costs, assuming a 20% down payment and 12% closing costs on a 30 year mortgage at 4.5% interest.  At this rate how can we possibly afford to build energy efficient homes?

The solution is to finance energy efficient residential buildings with interest free local financing. When this money is repaid to the local investors, regardless of whether they have invested labor, land or cash, it does not vanish into thin air, it circulates within the community at least one time. What makes the idea really exciting is that these investments, documented by equities will make the perfect local currency.

What I envision is turning small poor communities into mortgage free sanctuaries that can then afford to build or convert all residential buildings into greenhouse gas free buildings.

Category of the action

Building efficiency: Physical Action

What actions do you propose?

First of all this is not a proposal to reform the banking system or work with the banking system. I am simply proposing an interest free alternative to the bank mortgage that can be implemented at the local level.

Some 30 years ago we did have an alternative to bank mortgages. We called the alternatives savings and loan associations.  S & Ls did charge interests but the interest and principal that was repaid all went back to the local savers who's savings it was that financed the home purchase in the first place.  No new money was created or destroyed by this form of financing.

What happened is that the need to ever expand the money supply to prevent another depression led to the deregulation of the S & Ls, which kept the money supply expanding until the bubble burst.  Now S & Ls are largely an institution of the past. 

Fortunately, we still have a well established mechanism for developing real estate with interest free investments. We call these Real Estate Investment Trusts (REIT). REIT's can be set up in many ways but one way is for a builder and a land owner to get together to propose a real estate development that they believe will yield good returns form sales and/or rents, and then seek cash investors.

What I am proposing is that we can create a nonprofit REIT (hereafter referred to as the TRUST) that is dedicated to providing interest fee financing for the sole purpose of building or remodeling existing buildings to the standards that best address climate change. The TRUST would differ from the REIT or bank mortgage in the following ways:

1. The TRUST would accept land, labor, buildings and cash as investments by issuing equities in a form that could also be used as a local currency.

2. Instead of returns on investments coming from rents and/or sales, any returns on investments would come only from the increase in costs to duplicate the buildings and land financed by the TRUST.

3. With the savings in interest and non-renewable energy and the resulting economic development, the dollar value of the investments would rise faster than bank mortgaged "energy inefficient" buildings. Likewise, it is expected that the returns on TRUST investments would be greater than the returns on REIT investments for the same reasons even though no rent or profits from sales were collected.

4. The equities issued to the home buyer, labor, land or cash investors would be identical with the exception that a home buyer could not sell any of his equities, paid for on an approved payment plan, unless he sells his home or is given permission to sell some of his equity, by the TRUST, to meet emergency expenses.

5. Periodic appraisals will be made of all property in the TRUST in order to determine the current market value of the equities.

6. The TRUST will create a transparent accounting system available to anyone doing business with the TRUST.

7. The TRUST will include an appropriate pre-dispute alternative resolution dispute clause in every contract to which it is a party.

8. The TRUST will adopt and enforce a building code that best addresses climate change, for all homes financed by the TRUST..

9. The TRUST will collect all home payments and new cash investments and apply the money first to the redemption, on demand, of all equities accepted by local businesses as payment of locally available goods and services.

10. Any money left over will then be available to redeem equities, always at their current appraised value, as they mature on a schedule that is equal to the average periodic payments minus redemption of local equities redeemed by local merchants or service providers.

11. Fees will be charged for the above mentioned redemption’s to cover operating costs of the TRUST.

12. Equities that are not mature can be either used as a local currency, held as an investment or traded for a negotiated consideration.  This does not always mean that a trade will yield less that its current face value.  If the increase in value of equities is expected to be greater than other similar investments trades could demand a premium in the same way that bonds are also sold for a premium if the earnings are greater than normal.  

13. Fees will be charged for the above mentioned redemption’s to cover operating costs of the TRUST.

14. New building or remodeling projects will be undertaken only when there is sufficient cash left over after the above transactions have been made.

15. The only restrictions on the trading of equities in private transactions that do not involve the TRUST is that they shall be registered with the TRUST to prevent fraud and an agreement signed to abide by the TRUST agreement as long as the financing agreement remains in effect or an individual retains any equities. This would mean that anyone who owned all the equity in his home could sell it free from any oversight of the TRUST.  

16. The other option that a home owner has is that if he wishes to sell he he can sell it to the TRUST in consideration for the immediate release of all his equities, minus any depreciation of his home that exceeds the current replacement value of his home and land. The home buyer would then hold equities in the TRUST equal to their current adjusted market value.

17. Even though monthly interest free payment to the TRUST could be as little as half as much as the payments on a similar 30 year bank mortgage at 4.5% interest, the TRUST could base the payments on the home buyers income and resources. As long as the taxes and maintenance remained affordable the price of a home would not be nearly as important to a low income home buyer.   

Who will take these actions?

The short answer is anyone who sees investing in interest free financing of residential buildings that address climate change as the best investment they can make. In that regard anyone who might consider investing in a REIT would be especially quick to recognize the opportunity.  

More than half of the investment needed to build or remodel residential buildings into energy efficient buildings that address climate change is labor. The one thing that you can be sure of is that in poor communities there is an abundance of labor that is either unemployed or underemployed and investing in the TRUST could be the only opportunity they have.

To motivate this labor force to invest their excess labor in exchange for shares, the TRUST can guarantee that it will use payments made by home buyers and cash investors to purchase the equities from local vendors that have accepted them for goods and services.  As it becomes apparent that the shares increase in value, relative to the dollar, and that more goods and services are becoming available locally, the demand for redemption will decrease.

In addition to the above incentives investors will also be attracted by the social, environmental and even religious prohibitions against usury, implications of the investment.

The home buyer is also a critical actor and will be attracted for all the above reasons. But the overwhelming advantage for the poor is that it is perhaps the only opportunity a poor person may ever have to own his own home for less money than he is now paying for rent and non-renewable energy. Furthermore every payment made on a home will be applied to equity. .

All these same advantages, plus the creation of many new jobs, will also attract the migration of skilled labor and retired people, and many of the people that move into the community will be in a position to pay significant down payments or cash for their homes thereby leveraging many new projects.

Where will these actions be taken?

Everywhere that affordable energy efficient buildings can be seen as a way to increase the standard of living, security and address Climate change.

The first place these actions should take place are in small isolated villages, like the one where I live, where perhaps as little as 5% of the income, mostly from entitlements and low income seasonal work, ever circulates in the community. People often live in these poor communities because of the low rent or very cheap homes, but ironically the energy utilities are often higher than the rent.

Significantly, interest free financing of energy efficient homes in poor communities will, by contrast, create the most awareness of the investment and environmental benefits that can stimulate its adoption in towns, cities, and rural areas, globally.

Poor countries could also benefit from a similar financing arrangement with the difference being that the money portion of the investment needed for tools and materials could also come from investors in developed countries.  To encourage government participation, a small annual tax could be charged on the current value of the money portion of the investments.

How much will emissions be reduced or sequestered vs. business as usual levels?

As an experienced designer and builder of passive solar rammed earth homes, I can tell you that we can build such homes where I live on the New Mexico/Mexico border, that will not go below 60 degrees on the coldest winter night without a heating system installed. This is a comfort level that few homes now achieve because of the high costs of fossil fuels.

For domestic hot water we all know about solar.  And for electricity we all know about photovoltaics.  

And what we know about biochar is that for every pound of biomass we process in our home we get 4,000 BTU's of heat energy we can use for the above mentioned needs, and when we incorporate the biochar into the soil we sequester 1 pound of CO2 in the soil with a half life 1,000 years.

The biochar restores the vitality of the soil, reducing the need for fertilizers and water, increases production, sequesters even more carbon from the atmosphere and reduces the emissions of ammonia and methane. Increases food security and local jobs. 

What are other key benefits?

1. A vigorously expanding property tax base.

2. Reduced dependency on welfare.

3. Rapid growth in production of goods and services in response to the expansion of local currency.

4. A rapid expansion of construction and renewable energy technology jobs that will stimulate the migration of qualified investors of labor to fill the jobs not already filled by local labor.

5. The opportunity to expand the alternative financing to commercial buildings and sustainable agriculture in the area.

6. Alternative financing will help provide a safety net that will prevent the sudden collapse of the banking sector that could doom efforts to address climate change.

7. Renters who have never dreamed of owning a home will find it cheaper to buy an energy efficient home than it is to rent.

8. Eliminating the divide between renters and landlords helps create civic pride, cooperation and commitment to building a better community.

9. An important benefit is that the interests of labor would be aligned with the interests of other investors.  

What are the proposal’s costs?

All of the costs will be paid for by the savings in interest paid to the banks and the net savings in energy, while producing the bonus of truly affordable energy efficient homes and unprecedented economic development for poor communities.

Conversely, conventional buildings that can not be affordably remodeled with the local financing are sure to decline in value rapidly when energy efficient residential buildings that address climate change are more affordable.

I am even looking forward to the day when the primary value of a conventional residential building, that can not be affordably brought up to the standards that adequately address climate change, will be the value of the materials for recycling into residential building that do address climate change.

Time line

Many people believe that, primarily because of climate change, our unsustainable banking system is going to collapse or at least fail in a much bigger way than it has ever failed before. If this happens it will make it even more difficult or impossible to address climate change in a meaningful way.

Looking at the states around the globe that are failing now, largely because of the stresses of climate change, we see that even more stress is being placed on the environment by these failing states.

What I am saying here is that we are running out of time. A failure of our banking system before there is an alternative in place may destroy our very last chance to address climate change before it's too late.

With proven alternatives in place we can hope for an orderly nonviolent downsizing of our banking system, to the extent that the banking system will no longer be an obstacle to addressing climate change.

We don't know how much time we have left on the economic front but if within the next 2 or 3 years we have a highly visible alternative in place it could lead to a paradigm shift that could offer a lot of hope that we can address climate change in a meaningful way.

Related proposals

Carbon-negative biochar economies

Fix the system-get a global circular economy

References

1.  Seven Policy Switches For Global Security Presented At Nato Advanced Research Workshop, Split, Croatia 17th-18th Junehttp://blindspot.org.uk/wpb/wp-content/uploads/2013/05/SevenPolicySwitchesforGlobalSecurity.pdf

2.  CLIMATE CHANGE: THE BIGGER PICTURE  http://www.resurgence.org/magazine/article4147-climate-change-the-bigger-picture.html

3.  Richard D Wolff - Leading Marxian economist with analysis of why we can not fix our capitalist economic system. http://www.rdwolff.com

4.  Progress and Poverty by Henry George, 1880, abridged by Bob Drake, 2006.  Describes the role of land speculation in our economic system.

5.  Fractional Reserve Banking: How to Create and Destroy Money  http://www.financialsense.com/contributors/matthew-kerkhoff/fractional-reserve-banking-how-to-create-destroy-money