03/05/2007 FAQ #4: Does the concept still work when house price decline has already eliminated any equity left in the homes?

The key difference between the SwapRent (SM) approach and conventional shared equity or shared appreciation finance products (like those practiced in the UK and just got started in the US and Australia recently) is that the SwapRent (SM) based approach does not require any existing home equity. There could be a positive amount, zero or even negative home equity amount when the homeowners decide to use SwapRent (SM) embedded mortgages. It does not matter because they will not be sharing any existing home ownership with anyone in a legal contract. They remain 100% home ownership throughout the SwapRent (SM) contract period.

The homeowners will only be giving up partially or entirely the “future potential appreciation” which may or may not even be realized in the future. That potential could be monetized into a present payments to be received by the people who are willing to give it up, partially or entirely. They also get partial or entire future downside depreciation protection at the same time in a Generic SwapRent (SM) application.

It is easier just to think that once a homeowner decides to temporarily switch to the SwapRent (SM) based economic renting of course he will not have any future financial appreciation or depreciation anymore, just like a conventional renter economically. It does not matter how much home equity he has left at that moment when he decides to start using SwapRent (SM).

They can switch back any time they want to economically own the property again. In this way the rich or high income people would love it too since they get to be protected from the downside depreciation risk. Being a renter for a period of time will naturally avoid the depreciation risk during that time period.

The current conventional renters can also receive SwapRent (SM) payments and become a synthetic “economic landlord” in order to protect themselves from the future upside appreciation risk since they are currently renting only. If property prices go up it would not be good for them in the future. For example, if renters in LA or DC had used this SwapRent (SM) instrument 5 or 6 years ago they would not have felt being priced out of the market now when they decide tobuy and own property now.

The reason why that doing this could help the current defaulting mortgage borrowers now is that renting has become less expensive than owning once again since the interest rates have risen or been reset higher. So if the borrowers agree to switch back to renting economically temporarily, the synthetic “economic landlords” will be willing to make up the cost difference (3% annually as in the example in the slides) to them in monthly payments during the contract agreement period so that they can continue to service their mortgage payments to avoid default and foreclosure. The mortgage borrowers will get to keep and stay in their homes, as though they are renting their own homes for this contract period. They can decide to switch back to economically owning again whenever they will have higher income to pay for it or when interest rates become lower again later on to make the cost of owning less expensive.

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