Innovation Trio: SwapRent, FARJHO & TARELV

Shared Appreciation through Shared Cash Flows – the New Economic Owning, Renting and Own-Rent Switching Concepts as well as Business Methods for Managing Real Estate Properties –

09/28/2008 How adding SwapRent (SM) program to TARP could help taxpayers and homeowners.

The SwapRent (SM) program could be a very simple helpful addition to the current TARP bailout plan passed and signed on Friday, October 3rd. The government could allocate part of the fund as a reserve to offer very generous monthly subsidies for both distressed homeowners and normal citizens across the country. Every homeowner will be eligible on a voluntary participation basis. Being generous can ensure more active participation. Homeowners who receive the monthly subsidies to either avoid foreclosures or to use it for any necessary household consumption to boost our national economy will in turn agree to give up part of the future shared appreciation with the government (a similar feature to what is already in the current ineffective Housing Bill which came into effect on October 1st). Therefore this plan will also eliminate the need to have another separate fiscal stimulus bill to boost the economy.

The federal government would in effect simply act as the initial “economic landlord” by providing monthly subsidies to distressed homeowners to keep those homeowners in their homes and avoid foreclosures. The vast majority of all the mortgage securities will in turn recover in value immediately in anticipation of such a plan by the government. Hence, the banking credit crunch would ease quickly. We could therefore get to be saved from putting the entire $700 billions at risk. The total up-front amount of reserve required to be allocated to provide the total aggregates of future monthly subsidies in exchange for the long term real estate recovery investments through the SwapRent (SM) transactions will be only a very small portion if it.

The SwapRent (SM) program is simply a quantitative methodology to make it all possible. Government will end up holding these SwapRent (SM) contracts temporarily as the initial seed “economic landlord” investor and they could turn around at any appropriate time, transfer and sell these SwapRent (SM) contracts to any other domestic or foreign investors in a secondary market to bring fresh new free market money into our national economy. The involvement of taxpayer’s money will be freed up much sooner. The government’s role is only a temporary middleman to offer the investor confidence required during this crisis time.

For more technical explanations, please kindly review the FAQ #11 on the home page. Basically by extracting out the purified real estate exposures through SwapRent transactions and removing the incentives to default by borrowers the value of the MBS, CDOs and CDS could recover in a major way. This could potentially enable Treasury Department to make a lot of money for the taxpayers should the SwapRent (SM) program indeed be implemented in time.

If the government could clearly communicate this credible plan on how to recover the value and trading liquidity of the depressed mortgage securities, CDOs and CDS through solving the root mortgage default/foreclosure problems first, it would certainly help create the necessary investor’s and the public’s confidence and support in a bailout plan to restore the credit creation process of our banking system. Financial markets will immediately respond accordingly. If certain really sick banks need to borrow money for the short term from the Fed or to be assisted under the current TARP plan to survive they could still do so but with the systematic help on the horizon they would not face short seller pressure any more.

The homeowners get to be assisted first and foremost. The taxpayer’s money gets to be treated as a temporary equitable property equity investment which can then be easily passed on to other free market investors. The total amount of money at risk is minimized. No Wall Street executive’s compensation issues will need to be addressed since this plan does not favor any particular group. Everything is transparent and could be easily supervised and monitored. It seems to satisfy all the demanded criteria and our free enterprise capitalism system will get to remain untarnished.

The free market approach in this SwapRent (SM) program means anyone who needs assistance or optionally elects to receive monthly income now will simply have to give up a certain part of future appreciation potential in the future with contact values determined in a transparent marketplace. The more free willing participation by homeowners and profit driven new investors, whether they really need assistance or not, the less foreclosures, the more new purchases of homes there will be and the sooner the property market will be stabilized and heading for a upside recovery. That is simply how a free market would work. The government’s seed fund will act as the catalyst to get this wealth creation process started again.

Since the $60 billion slated for the second stimulus plan is already prepared for as a give-away, homeowners in each city should be able to negotiate a much better SwapRent (SM) rate (hence a larger monthly subsidy now for a smaller shared appreciation in the future). It’ll be much better than throwing this $60 billion away without asking anything back for the taxpayers. So this could be a very popular and wholesome plan for the nation and it will fix all the fundamental and derivative problems for our economy.

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09/20/2008 Sports car vs. school bus.

I have recently received a question from one of the housing managers of a City that we have been proposing the SwapRent (SM) Project to for quite some time.

“Just checking with you on any update with SwapRent. With all the recent turmoil in the financial markets and comments by a financial analyst recently on tv/radio that part of the problem has been the esoteric and complicated derivative securities that companies invested in, do you think that SwapRent in it s purest form still a viable financing tool for housing? Seems that people right now would want to avoid any type of complicated financing alternatives???”

He is quite right in pointing out that the damages the leveraging effect of complex derivatives could potentially cause. To set the matter straight, a quick answer is that the root cause for these spectacular collapses is the over-leveraging abuse, not just the complexity of complicated derivative instruments themselves. The issue regarding why complex derivatives may be easily abused and why simple and non-leveraging effect of non-complex and transparent derivatives such as SwapRent (SM) are good have been adequately discussed in the FAQs #15 and #16 at the home page already. I will not repeat them here.

The challenge is that for people who do not have financial background knowledge they all may appear to be the same thing. Those people could not intelligently tell the good ones from the bad. When they heard of the headline news mentioning the word derivatives they by association immediately think all of derivatives are bad, without even knowing what they are. It is as though a man from the Amish village saw a car accident and got further convinced that all automobiles are bad. They would not be able to tell that the recent bloodbath on Wall Street is quite similar to an over-dosed drug addict driving a turbo-charged sports car at over 100 mph into a side walk cafe on a busy street in NYC. Many other benign consumer financial products that have incorporated fail-safe and simple derivative concepts such as SwapRent (SM) and HELM do not carry any remote similarities.

To extend the same analogy, SwapRent (SM) and HELM may be analogous to a school bus specifically designed to be driven no faster than 30 mph on the suburban streets by 40 plus year old mothers with their own children on board. Since day one the design of these consumer financial products were created to be simple and safe, without any over-leveraging abuse possibilities by any kind of the end users. These simplicity and safe features designed for unsophisticated homeowners were a major part of the main reasons why they were invented to begin with, away from those institutional complex derivative structures. Again these issues have been fully explained in those FAQs mentioned above.

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