A Financial Partnership - University of Phoenix Research

Craig H. Martin, Ph.D.
University of Phoenix, Phoenix, AZ, USA
Northcentral University, Prescott Valley, AZ, USA
• 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
• Price Bubbles
(8 in the US market since 1803)
• Use of short-term lender resources to
finance long-term mortgage assets
Issues for the housing market
• 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)
Correlations with stable
housing prices
What about varying interest rates???
Prime Fixed-rate Mortgage
Real rate of return
Average inflation rate
Unemployment insurance
Rate of foreclosures
Total secondary market rate
Total primary market rate
(1% typical broker markup)
We can develop stable mortgage
interest rates
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
What should our goal be?
• 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
Issues for the Social Security
Retirement Fund
• 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!
The case for Social Security as
an annuity
Successful annuities, already up and running!
• Chile (1981)
• US Federal Government workers (1984)
• Argentina (1989)
• Australia (1991)
Can we fix Social Security and maintain the
retirement system?
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
• Resources needed : $2.7 trillion, to be
raised through a preferred stock offering
How much will this cost?
• 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
Benefits to be gained by such a plan
Benefits to the Social Security Fund
• Additional investment sources become available
• Mortgages
5.4 - 6.6%
• Treasuries
• 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
• A stable mortgage rate of 6% practically
eliminates price bubbles and severely-restrictive
interest rates
A symbiotic partnership