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 –

01/26/2009 A sensible stimulus plan to restore confidence – revisiting an old topic.

I would like to tell the same story about the SwapRent based economic policy proposal in a different way.

Given the crisis nature in the current financial markets and especially the doubtful recovery of the residential real estate markets for the foreseeable future in the US, few investors or even potential long term homeowners would jump back in to buy a real estate property at the moment. Simply put, if they buy now, no matter what a bargain they may get, the house may become even cheaper again later on in a free falling housing market. This is the lack of confidence that many people have been talking about regarding our national economy these days.

To restore this national economic confidence, the give-away bailout money could better be converted into incentive seed money to help put a floor to the residential real estate markets in the US. On surface, if there were access to unlimited capital for the federal government by simply printing more money, the government could for sure easily turn the tide over. Realistically, the federal government does not have access to unlimited capital, nor do they need to. It could simply become a bullish buyer of the residential real estate properties the same way many governments use national funds to buy stocks to shore up investor’s confidence in the stock markets in the past during a financial confidence crisis in many countries. On top of all that, the federal government could also throw in a few tax incentives such as a holiday period waiver of capital gains taxes to add fuel to the fire.

Economically speaking, this seems to be the only way the new Obama Administration could wisely use the tax payer’s money as massive chips on the gaming table to bluff the hell out of world-wide investors’ psychology. Given enough initial seed capital, they may just be able to corner the entire residential real estate market in the US. That is all they would need to do to urgently keep our economy out of an imminent depression by solving the root cause of all our current economic ills. As I mentioned earlier before, once the snow stops to melt in the mountain tops, our dams and levees are actually quite OK to hold the water back into the rivers.

The simple fact is that if the US government does nothing in this direction to push up the real estate markets by bluffing the investors, the national wealth will continue to dwindle within the next decades. Every tax payer will lose more wealth and there would be no potential loss of capital gains tax revenues to collect since everyone will end up in poor house and there would be no “capital gains” to talk about. On the other hand if the cornering is successful. Homeowners, speculators/investors and the governments will all be happy since each one of them could enjoy partial “capital gains” through their share of the fractional interests in the homes. Government’s portion of the shared potential appreciations could best be realized earlier under a no loss policy by selling these SwapRent contracts owned by them to other free market based domestic and foreign investors in order to regenerate the capital needed for the program along the way. Therefore the initial capital the governments put up will indeed only perform the crucial function as a seed money to bring free market investors back into the real estate markets, with no intended profit or loss motives in the process.

If this all makes sense, the next step is to find some sensible methodologies to implement these quite simple economic ideas. This is where the SwapRent methodology comes in. Since the best way for the federal, states and local governments to buy the financial interests in homes is through some transferrable financial interests similar to stock certificates in corporations so that they could avoid high transactional cost and would be ensured of enough secondary liquidity to resell these financial interests to other free market investors later on, they would need some new financial instruments to be invented that could represent easily transferrable fractional interests in people’s homes to do so.

The most immediate way people would think of to accomplish this could be some old concept called a sale-lease back program for homeowners so that Uncle Sam could act as the temporary landlord. But traditional sale and lease back program does have the problems of high transactional cost and low liquidity for the investors. On top of all that, homeowners would have legally lost their homes already, together with many other financial and non-financial complications such as those in taxes as well.

The SwapRent transactions were specifically invented back in 2006 before the crisis even started to facilitate a new form of synthetic ownership of the traditional sale-lease back transaction. A synthetic sale and lease back program, so to speak. This was made possible by introducing the new consumer concept of “economic renting” where the legal ownership is separated from the economic interests and the financial interests in a real estate property. For more detailed info again, please visit the home page at .

A good example (just one out of many possibilities) of how to use a holiday waiver period on capital gains taxes to complement the SwapRent program could be a sliding scale of 100% to 0% waiver within the next 10 years of the current capital gains tax rate (100% waived during the first year, 90% the second year, … and 0% in the 10th year, etc.). But again, the eligibility should be made widely available to everyone who may decide to make a new purchase of a residential real estate properties from the date of green light until the end of the 10 year period, not just limited to owner-occupier homeowners. There always seem to be endless policemen in a bailout plan but since this is supposed to be an incentive, not a bailout plan, we do not need to restrict people from accessing the program. There should not and would not be any preferential treatments to anybody. We will need to bring back those free market based profit driven investors/speculators into actions so that the buying frenzy melt-up scenario in the real estate market could really happen. These speculators/investors are an essential part of our free market mechanism.

One caution for the governments though. On the way back to higher property value, we will need to make sure to curb the excessive borrowing by either homeowners or speculators this time around. The troubles we are having today were the results of the burst of a bubble made of hot air. It is hot air because buyers in the past used other people’s money to buy. The leverage induced asset bubbles were doomed to burst. If leveraging was under strict control then the a bubble could be made up of molten lava instead of hot air. On one extreme, the cooled rocks will not burst at all if people don’t borrow money to own financial assets. To be fair, low reasonable amount of leverage may create some hot air chambers inside the cooled rocks but they will not burst like hot air balloons. It could actually be the right way to create long term wealth and welfare for our economic societies.

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01/19/2009 From low income renters' perspective – revisiting an old topic.

As a refresher introduction to SwapRent, here below is a short description of SwapRent by looking at the economic benefits of SwapRent from a current renter’s perspective. It may have more relevance for housing agencies at local governments because this description of SwapRent is on its social value in providing housing affordability to low income people in particular. The involvement of the local governments in implementing the program could ensure that there would not be any opportunity for abuse of this yet to be implemented new innovative system by private sector firms that may cause systemic risks.

As we all know that similar abuses in conventional mortgage underwriting in the past had primarily led to the housing-led financial crisis in the US. So the innovations are really more than just some new economic methodologies or tools but also the newer thinking on who should be better involved in our new housing finance system for our economic societies in the future. In addition, the local governments could treat this new program as a major revenue source for better managing the governments’ own finances (see the business model for middlemen on slide #11 of the presentation file at ).

SwapRent is the realization of the newly invented consumer financial concept of “economic renting” while keeping the legal ownership for homeowners. The answer to the perennial question of to buy or to rent varies as time evolves. Sometimes the rental rate (say renting at 2% per annum) is higher and more expensive than owning (say 1% through artificial teaser rates). Other times the reverse is true (say 5% mortgage rates when teaser rates expire). It would be nice if property owners can have a choice to separate the legal ownership from the economic interests and hence the financial risks and rewards of owning a property. The three SwapRent transactions (Generic, AG and DP) were created to facilitate these new concepts.

In the current housing-led economic crisis context, the benefits are two folds. Present low income apartment renters could move up to live in bigger, better houses and enjoy higher quality neighborhoods through the true legal ownership of the houses they live in if they agree to share the appreciation with other investors, as their economic landlords, the future appreciation of the houses that they live in. If they do not take this voluntary offer and decide to stay apartment renters they will not have this better living comfort and quality neighborhood and they will have no share of the future appreciation of any apartments or houses whatsoever as an investment.

Therefore, they could decide to participate in a fair share of future appreciation of the house they select to live in, purely based on their economic monthly income capability, without over-stretched borrowing to enjoy these investment opportunities. Or they could simply decide to keep that extra monthly income investment capability on something else, other than the potential property value appreciation as the housing value appreciation may or may not happen during their life time. The property value may actually decline, as many have been convinced by now.

Through the new “economic renting” concept facilitated by SwapRent transactions, separation of legal ownership and economic ownership could be realized so that traditional low income renters could move up to enjoy 100% comfort of legal ownership of better living environment and either partially or fully (25%, 50%, 75% or 100% etc.) participate future appreciation of an economic ownership solely based on their un-leveraged or reasonably leveraged economic monthly income ability.

This realized partial or fractional economic ownership structure could reduce the present and the future abuse of undue leveraging that often lead to defaults/foreclosures and an eventual collapse of leverage-induced asset bubbles. Meanwhile, low income families could continuously enjoy the comfort of the homes of their choice, irrespective what happens in the financial value of the properties they live in. Again, for more info please visit our research web site at .

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01/18/2009 How to profit from trading distressed MBS or mortgage whole loans – a revisited topic.

As discussed many times before, there are plenty of trading opportunities for investment funds in the current market. This aspect of the SwapRent applications is on trading distressed MBS or mortgage whole loans in the US. Say an investor buys them at 20 or 30 cents on the dollar on the left hand and offers SwapRent contracts to those homeowners directly on the right hand so that these related mortgages will no longer default for the next 5 or 10 years. The investor could turn around and sell these MBS or mortgage whole loans at a recovered value (say 70 or 80 cents on the dollar) to realize a profit immediately once the SwapRent contracts are closed with the homeowners.

The investors can later on at their leisure sell and get out of these appreciated SwapRent contracts (which represent synthetic equity exposures in the underlying properties specifically using appraised value or through some regional house price indices) to other investors at a profit. However, due to the larger realized profits from trading these distressed mortgage loans or securities already it may not even matter whether they make money or not on these SwapRent contracts. The investors will continue to have the commitments of paying small monthly subsidies to each of the homeowners if they do decide to hold on to these SwapRent contracts and wait for the longer term price recovery of these underlying properties.

In a sense, a SwapRent contract is like the carpentry, roofing, plumbing or electrician service that a smart fixer upper property investor could engage to fix up a distressed property in order to sell it at a higher price later on for a quicker turn-around profit. Otherwise, these distressed properties could stay and remain distressed forever if nothing is done to fix them up.

This investment strategy could also be a great marketing tool as well in order to raise more institutional or even retail funds if effectively communicated through legitimate fund raising vehicles to illustrate a clear intended path to make trading or investment profit. The investment managers could clearly add value by offering SwapRent contracts to homeowners in this buy-low, sell-high trading process of mortgage backed securities or mortgage whole loans.

We have been presenting this investment/trading strategy to many institutional investors in many countries for over two years, including even the TARP fund so that the American taxpayers could benefit from them as well. Nonetheless, as of early 2009, the opportunity still exists for smart private sector funds to take advantage of these trading strategies and be among the first few to implement them. The SwapRent transaction is simply a detailed systematic methodology to quantify, price and legally make creating a secondary market for these simple shared appreciation economic concepts possible. Our role is only to offer consulting services and the licensing of these methodologies to assist the private sector funds in the various implementation steps to achieve their investment goals.

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