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 –

01/18/2009 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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