Craig H. Martin, Ph.D. University of Phoenix, Phoenix, AZ, USA Northcentral University, Prescott Valley, AZ, USA

Objectives To develop a long-term, stable interest rate for The mortgage market An annuitized market return for Social Security To create independent financial organizations Fannie Mae, Freddie Mac, or Privately-owned secondary markets

Issues for the housing market Price Bubbles (8 in the US market since 1803) Use of short-term lender resources to finance long-term mortgage assets

Correlations with stable housing prices Median housing prices correlate with median incomes, 3:1 (Schiller) Housing prices correlate with building and construction cost indices (forecast to decline 2%) Housing prices correlate with population growth, forecast at 2.1% (Diether)

What about varying interest rates???

We can develop stable mortgage interest rates Prime Fixed-rate Mortgage Real rate of return2.1% Average inflation rate3.0% Unemployment insurance1.0% Rate of foreclosures.3% Total secondary market rate6.4 Total primary market rate 7.4% (1% typical broker markup)

What should our goal be? The Agency Principle: A transaction should benefit all parties Stable interest rates for borrower and lender Fair market return for borrower and lender Strong secondary market for lenders

Issues for the Social Security Retirement Fund The Social Security Old Age and Survivors’ Trust Fund is not annuity-based The current system is a pass-through “ponzi” scheme – i.e. the current generation is paying for the previous generation Currently, investments in the fund are limited to Treasuries with only a 4.9% expected return

The case for Social Security as an annuity When Social Security began, 41 workers paid for 1 retiree; today’s ratio is 3:1 – the forecast for the near future is 2:1 Demographic trends predict healthier old age and longer life expectancy The Social Security Trust Fund is already in the hole!

Can we fix Social Security and maintain the retirement system? Successful annuities, already up and running! Chile (1981) US Federal Government workers (1984) Argentina (1989) Australia (1991)

How much will this cost? Based on current participation of 38.5 million at $15,000 each, we need $5.1 trillion to convert to an annuity-based system Current investment in treasuries: $2.4 trillion Resources needed : $2.7 trillion, to be raised through a preferred stock offering

Benefits to be gained by such a plan The plan is an annuity-based program Use of preferred stock will not increase the US debt level Today’s average participant will receive $15,000/year; tomorrow’s will receive $60,800/year at a conservative 5% rate of earnings

A symbiotic partnership Benefits to the Social Security Fund Additional investment sources become available Mortgages % Treasuries 3.7-6% Blue chip bonds 7-8.5% Government realizes a reduction in long-term debt An annuity-based plan pays participants at a guaranteed 5% return

A symbiotic partnership Benefits to Fannie Mae & Freddie Mac Mortgages sell at a stable discount rate at approximately 6% An independent financial organization is relieved of political influenced financial strategies and decisions A stable mortgage rate of 6% practically eliminates price bubbles and severely-restrictive interest rates