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 –

SwapRent (SM) Introduction

Introduction to SwapRent (SM) (Cash Flow Sharing) and FARJHO (SM) (Equity Sharing)
– New Alternatives for Property Owners and Investors

  • Sharing Appreciation through Sharing Cash Flows in A Real Estate Property Ownership
  • The New Economic Owning, Renting and Own-Rent Switching Concepts and Business Methods for Managing Real Estate Properties.
  • Separating the Investment Value from the Shelter Value of Owning A Real Estate Property.

US Patent Application Pub. No.: US2007/0244780 A1, Pub. Date: October 18th, 2007

An Introductory Paper: “The SwapRent (SM) Transactions for Homeowners, HELM and FARM – A New Alternative Housing Finance System”, December 2009 Issue of Housing Finance International (HFI) published by International Union of Housing Finance (IUHF)

All new concept developments since 2007:

This site was set up to provide research and technical information about SwapRent (SM) and its related consumer financial products for property owners and investors. The original text content was started on May 19th, 2006. Newer texts and FAQs were added as time evolved in a chronological order to keep track of the thoughts development process and the historical chain of events of our economy and the financial markets.

The latest developments on how to utilize the free enterprise based SwapRent (SM) solutions and the shared appreciation aspect of the SwapRent (SM) related concepts as a timely economic policy to solve the current Western financial crises in the US and Europe, new application opportunities to assist the poor to own homes in developing countries as well as the potential applications to create a new type of Islamic housing finance products or a brand new alternative housing financial system based on a flexible and reversible shared economic ownership structure, FARJHO (SM) made possible by the new “economic owning, renting and temporary own-rent switching concepts” as facilitated by SwapRent (SM) contracts are located at the Blog.

The SwapRent (SM) transaction is the realization of the newly created consumer financial concepts of “economic owning, renting, and temporary own-rent switching” while keeping the existing legal ownership structure for homeowners and other investment property or commercial property owners during the entire contract period.

Unlike the conventional way of using a “shared equity” or “equity sharing” method to accomplish the shared appreciation objective, a SwapRent (SM) contract was invented to use an innovative business method of quantifiable “shared cash flows” or “cash flow sharing” technique to accomplish the appreciation sharing objective of owning a real estate property.

A conventional legal ownership entitles a property owner the right to occupy and use the property, which is the “Shelter Value”, “Utility Value” or simply called “Use Value”, as well as the right to obtain future financial upside appreciation gains and the obligation of bearing downside depreciation loss, which is the “Investment Value”, “Financial Value” or simply called “Economic Value”. A SwapRent (SM) contract aims to separate the investment value of a conventional property ownership from the shelter value in order for the owners to better manage the financial risk and return aspects of a property ownership while maintaining their shelter value at all times.

This newly invented economic concepts of “economic owning, renting and switching” as facilitated by the three basic variations of SwapRent (SM) transactions (Generic, AG and DP) help both the defaulting mortgage borrowers hold on to their homes and the distressed RMBS, related CDOs or CDS investors curb their financial losses.

Click here for the latest SwapRent (SM) presentation file Version 7. This 2009 version contains a simple example of how a Shariah compliant new housing finance product and system based on applying the flexible economic owning and renting concepts through SwapRent (SM) contracts to a modified common Islamic Diminishing Musharakah (declining partnership) mortgage structure could be created to provide genuinely debt free joint home ownership. This new structure was originally called FARM (Flexible And Reversible Musharakah for Muslim consumers or Flexible And Reversible Mortgage for Western consumers).

The existing so called “Islamic mortgages” in practice until today are unfortunately mostly mirror image copies of the Western mortgages with the interest payments disguised under a different name. The home owners could still get foreclosed and they still do have to carry the burden of debt. There is plenty of room for innovations to design a more genuinely equity based home ownership that could better comply the Shariah laws for the Muslim population, hence the efforts on FARM.

Subsequently it has since evolved into a new home ownership structure called FARJHO (Flexible And Reversible Joint Home Ownership). It was created to be universally offered to all consumers and it carries no religious or philosophical meaning. Ideologically, however, it may be more appealing to the Muslim population since coincidentally, there is no Riba concept (i.e. the burdening of people through borrowing and lending) involved in this exciting new housing finance product innovation. However this new invention has nothing to do with the Islamic finance principles other than the author’s original inspiration by the coincidental desire to have a new genuinely equity based home ownership.

The creation of the US version of FARJHO (SM) in 2010 was more a response to the increasingly restrictive legislations such as the new Dodd-Frank rules, etc. Since FARJHO (SM) is neither a mortgage nor a financial derivative product, the simplicity in its structure has made it much easier to commercialize and much faster to gain consumer acceptance.

Furthermore, The US version of FARJHO (SM) does not have to be an absolute 100% equity based structure. Members in a FARJHO (SM) LLC structure could still prudently use debt financing, but only at the member level on an individual basis. This relaxing feature to allow borrowing could accommodate the Western oriented pro-debt culture and become more acceptable to property speculators in the Western world.

With or without individual borrowing involved, the successful implementation of this new universal home ownership structure FARJHO (SM) by homeowners could potentially make the term “mortgage foreclosure” or “property repossession” obsolete, when borrowing is only allowed under the FARJHO (SM)proposed method, i.e. lending to partial owners only at the member level and not at the property level. Therefore, future defaulting members in a FARJHO (SM) structure will be able to simply walk away quietly and be replaced by another investor or the lending bank without affecting other co-investors and most importantly, without disturbing the home occupiers since the collateral is the individual member interest rather than the entire property.

This special feature above is exactly the reason why that the new FARJHO (SM) home ownership structure should be considered to be more a social innovation than simply a financial innovation.

When lesser credit-worthy aspiring home owners have already resorted to this new equity financing method, what is left for the banks to lend to will be much better credit quality home buyers/borrowers. More free market based consumer choices will always be a win-win situation for everybody under the uninhibited free market capitalism.

In the US, the legal entity structure arbitrarily selected back in 2010 to be used to implement the FARJHO (SM) concept going forward is the familiar LLC structure in order to corporatize American homes, one home at a time. People ought to know that borrowing should not be the only way to own homes. When this new concept and method take off, it could finally accomplish the goal of creating a liquid equity market for homes just like there have been liquid stock markets for major businesses in many countries since over 300 years ago already.

Click here for a comparison on when and how to implement the SwapRent (SM) powered HELM vs. FARM. For a scaled down and limited version of current FARJHO (SM) offering, please see There are no inherent obstacles other than the ideological issue and the lure of easy credit in our existing financial systems in the Western world. A not-for-profit organization PeoplesAlly Foundation at was set up to offer the FARJHO (SM) services to specifically help increase housing affordability to low income working families.

From the government’s perspectives, tightening the credit spigot a bit and introduce non-lending based FARM or FARJHO (SM) types of housing finance products to homeowners could stabilize the society without sacrificing any overall homeownership level for its citizens. While HELM seems to be able to offer timely helps to fix the current mortgage default mess through an economic version of the conventional shared equity or shared appreciation concept in certain hard-hit countries such as the US, the UK, Ireland, Spain and the UAE (Dubai). FARM or FARJHO (SM), on the other hand, seems to be much better suited for building a stronger foundation of a brand new alternative housing finance system or additional home ownership structure in any country going forward.

Click here for the original technical product design paper written back in early 2006. This paper was written as a blue print for bank professionals to understand how to produce these new housing finance products from mathematical and internal risk management perspectives, not for the average consumers, and therefore it may appear a bit overly complicated. It may be more useful to refer to for more specific mathematical or technical subjects of the SwapRent (SM) methodology after going through the general introductory information in the presentation slides above.

Click here for “SwapRent (SM) Transactions, HELM and FARM – A New Alternative Housing Finance System”.  It is a more recent compilation of the various SwapRent (SM) related articles published in the December 2009 issue of Housing Finance International (HFI) of the International Union of Housing Finance (IUHF).

Click here if you are a central banker for a copy of “SwapRent (SM) as A New Alternative Economic Policy Management Tool for Governments and Central Banks”.

What is a SwapRent (SM) transaction?

In the past few years the fictitious housing affordability in the US was created based on transient short term variable interest rates. When the rates were already trending higher the low income borrowers were still lured into owning by the “teaser rates”. Those subprime borrowers were originally not qualified as owners. They could at most rent to have a shelter to sleep in. They should have been renters to begin with given there was no other viable true housing affordability offered through any conventional shared equity or shared appreciation finance products in the US.

The answer to the perennial question of to own or to rent varies as time evolves. Sometimes the rental rate is higher (say at 2% of house value per annum) and more expensive than buying (say at a temporary teaser rate of 1%). Other times the reverse is true (say at a 5% mortgage rate 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, a way to continue the legal ownership and synthetically switch back and forth between owning and renting only economically according to the market conditions and their monthly income reality at the time.

That goal is what the SwapRent (SM) market was designed to achieve. It functions as a flexible and reversible “temporary own-rent switch” driven by the own-rent cost differentials and/or investment views. Homeowners could use them in the new SwapRent (SM) embedded mortgages (Home Equity Locking Mortgage, HELM) either with their existing lenders through a loan mod conversion or with any other new lenders that offer them through a refinancing arrangement. Alternatively it could be offered through FARM (Flexible And Reversible Mortgage), which is a new way to let renters flexibly and reversibly enjoy partial or full future appreciation of the real estate property that they occupy.

If the generic SwapRent (SM) rate is trading at 2% of the current house value and the current mortgage funding cost is at 5% of the current house value for a 5-year SwapRent (SM) contract there will be an annual 3% differential between the SwapRent (SM) payments and the mortgage payments. That means the renting is cheaper than owning in this example.

So if the defaulting subprime borrowers decide to switch back to the more affordable renting only economically for a period of time they will be able to receive 3% annual subsidy in monthly payments from the synthetic investors so that the borrowers could afford to continue to keep legally and stay in their homes. If they agree to become renters (of their own houses) economically for a period of time they will not have any appreciation benefits or downside depreciation risk during that time period, just like conventional renters. The investors who act as the “economic landlords” by receiving the SwapRent (SM) payments and paying out the mortgage funding cost will.

The borrowers could switch back to the full ownership until SwapRent (SM) contract expires or whenever they want to unwind the contract without restrictions before maturity because they may have more monthly income to pay for it later on or because they may decide to move and sell the house.

The SwapRent (SM) based economic renting could easily be done for only part of the house value, say 25%, 50% or 75% of the current house value instead of the entire 100%. That means the homeowners could decide to be only partial economic renters for a period of time so that they could get enough monthly subsidy to afford a home. The low income working family, young first time home buyers and the senior community could all benefit further from the flexibility on both the notional amount and the duration of the economic renting period offered by a liquid SwapRent (SM) trading market in their neighborhoods or cities.

This new ability to separate the economic ownership from legal ownership has many other advantages. For example, the moral hazard and the home improvement issues of the conventional renting will be alleviated through the economic renting concept of SwapRent (SM). Having the legal ownership will give you the alpha of holding an asset, switching to economically renting let you hedge away the beta of owning a property.

Therefore a public housing project with SwapRent (SM) based economic renting will be a much better neighborhood than the one with a conventional renting only because people will invest in home improvement freely since they still legally own it no matter what happens next with the real estate markets in general. They will only give up the neighborhood appreciation/depreciation potential represented by a neighborhood or city property price index (such as the MSA level of the OFHEO HPI) in exchange for receiving the monthly subsidies.

Whatever home improvement investment they have already made to the properties they will be able to get to recoup those investments when they actually sell the properties legally later on. The development of this new economic concept will have great implications for urban planning and public housing policy in the future.

As a perhaps a bit extreme example, domestic servants for the first time may even live in the same building or neighboring buildings located in the same tony neighborhoods as their employers do due to this newly created “portable housing affordability”. Their employers may enjoy the full ownership (both full legal and full economic ownership, i.e. with the entire upside financial appreciation potential) because of the employers’ high monthly income earning power.

The domestic servants may get to enjoy similarly the full legal ownership and maybe only a much smaller economic ownership which entitles them to the financial value of only a small fraction of future appreciation potential because of their much lower monthly income levels. They can of course buy into more fractional units of future appreciation potential of either their own home or the city level property value through SwapRent (SM) contracts at their free wills any time when they start to have higher earning power in the future. Meanwhile they may enjoy a nicer living neighborhood and their children may get to attend the same high quality school districts as their employers’ children do.

While upon first thought, acquiring the future appreciation potential of properties could be a desirable thing to have, it does come with a cost and the cost of this investment could be totally wasted as we have seen in recent years if the value of real estate property declines, let alone the risk of bearing the financial losses that usually comes with economic ownership when the property value actually declines.

Houses may appreciate in value slowly through time under most usually competent governments but we can not always count on governments to do the right things. Crony politicians formulating stupid laws and policies to destroy national wealth is vividly visible in history, and whenever you turn on your TV.

Therefore the inability of the low-income people to participate in the boom and bust cycles of the property investment games may not necessarily be a bad thing after all. Through SwapRent (SM) contracts they could simply continuously enjoy the comfort and the security of their homes by having the legal ownership and becoming the “economic renters” of their own homes irrespective what may happen to the financial value of the property markets in the future.

The main implications of this are that first, cities may not need to waste taxpayer’s money to build that many low income housing complexes anymore, which often end up slums and they foster class distinctions and prejudice in our human societies. Second, low-income people will no longer be forced, duped, coerced or at some other occasions, be allowed to wilfully intend to go into borrowing and owning something they could not afford (i.e. the combined cost of both legal ownership and future appreciation potential as expressed in the economic ownership) based on their current earning power.

The abuse of over-leveraging with a hope to get rich quick that had caused our current default-led global financial crisis will have much less chance to get to be repeated on a massive scale again. People will learn that success in life will have to be earned in an old fashion way through hard work instead of keeping hoping to gamble with other people’s money through borrowing. The practice of the simple economic concept of shared appreciation will indeed automatically discourage the abuse of over-leveraging in our economic societies. SwapRent (SM) and REIDeX are the newly invented business method and marketplace to make that simple economic concept a reality in the most effective and efficient way.

To summarize, among many other applications, the five key economic advantages that the SwapRent (SM) and its related consumer finance products are:

  • 1. For those informed and educated homeowners to hedge the financial value of the properties that they own by switching between owning and renting economically only based on their views on what the overall real estate market will do in the near future while keeping the legal ownership of all their properties at all time.
  • 2. Considering the relative cost of owning and renting, the less affluent homeowners could decide to be economic renters or owners solely based on how much monthly subsidy they could receive to afford legally owning the properties while being partial or entire economic renters for a period of time. This will increase the housing affordability for young first-time would-be homeowners, low income working families and retired senior citizens. Specifically, it offers a much better alternative to the ineffective, inefficient and expensive reverse mortgage product for the senior homeowners.
  • 3. Due to the alleviation of moral hazard associated with conventional renting, SwapRent (SM) will improve the neighborhood quality of both the public housing projects and the conventional apartment rental complexes. It could thus reduce crimes and improve the overall well-being of the urban environments anywhere in the world. With this newly created “portable housing affordability”, municipalities will no longer have to waste taxpayers’ money to build affordable housing complexes that often turn into slums.
  • 4. For both institutional and individual investors to become synthetic “economic landlords” by simply receiving SwapRent (SM) payments and paying out mortgage funding cost for a particular neighborhood or city. They could establish such cross border reversible long property exposures easily all over the world without worrying about the management of these properties and incurring the normally high transactional cost and taxes.
  • 5. For current apartment or house renters to establish an “anticipatory hedge” position through receiving SwapRent (SM) payments based on a particular city level property price index so that they can lock in today’s real estate price levels for intended purchases of real estate properties in that city in the future. They would not be priced out of the market if indeed real estate prices rise sharply in the future.

Although the settlement of a SwapRent (SM) contract could be done with a property price index, a property appraisal method or the real transaction price, let’s use a simple application example of index-based SwapRent (SM) contract to illustrate the basic economic benefits of a SwapRent (SM) contract.

A homeowner who lives in Los Angeles may decide to be the “economic tenant” of his/her own home in Los Angeles by paying SwapRent (SM) rate (at say 1.5% per annum) based on the Los Angeles metropolitan area index to an investor who is willing to be his/her “economic landlord” investor for a contract maturity of 10 years and simultaneously receiving an annual mortgage funding cost (MFC) of say 5% from this investor for the duration of the SwapRent (SM) contract.

Once this contract is executed, during this 10-year contract period, he/she would have locked in the current price level of his/her own home and would not have any future appreciation potential or any downside depreciation worries anymore. The homeowner could decide to unwind and terminate this SwapRent (SM) transaction any time (e.g. 6 months, 1 year or 2 years later) before maturity due to relocation, new jobs with higher monthly income, investment timing views (i.e. cutting loss, taking profit, being bullish about the LA property market again) or simply free will.

The reason why this decision is to be made could be based on either a hedging purpose, an equity withdrawal or appreciation give-up cash-out purpose since he/she would receive a netted monthly payment from the investor, both as explained above, or simply a pure life style change purpose.

For example, this person may be retiring in 10 years and may decide to relocate to Hawaii for his/her retirement. He/She could then enter into another SwapRent (SM) contract of similar remaining maturity based on the Honolulu metropolitan area index with another counter-party homeowner in Honolulu by receiving a SwapRent (SM) rate (at say 2.5% per annum) and simultaneously paying an annual MFC of say 5.5% so that he/she could become an “economic landlord” him/herself in Honolulu.

By doing so he/she would be able to move to Honolulu 10 years later to look for an ideal dream house in that city and purchase the chosen house then at a price level (say per sq ft price) that was locked in 10 years earlier through the SwapRent (SM) contract.Both of these two separate SwapRent (SM) contracts could be unwound and terminated earlier before or on the final maturity dates, either together or separately, at some freely traded secondary markets such as REIDeX, the dedicated SwapRent (SM) marketplace. Of course they would have to be unwound at the then market rates to reflect a profit or loss, just like how any other financial instruments operate in their own markets.

In the foreseeable future, homeowners might be able to apply this on an international scale. For example, a homeowner in London could decide to do a retirement life style change plan through SwapRent (SM) contracts so that he/she could retire in Nice in South of France. Homeowners could do the same between Tokyo and Singapore or between Beijing and Taipei.The decisions could also be financial and investment view driven. A resident in Toronto may think that the future real estate property appreciation potential in Australian metropolitan area could be higher for the next 5 years than Canadian metropolitan area. He/She could then make arrangement through city index based SwapRent (SM) contracts and be a 80% “economic tenant” in his/her own house in Toronto and be a 40% “economic landlord” investor in both Sydney and Melbourne.

Financially speaking, with very little hassle and transactional cost, he/she would then have a diversified investment exposure composed of 20% Toronto, 40% Sydney and 40% Melbourne in his/her medium term investment portfolio on the residential real estate markets. Socially speaking, he/she and their children will continue to enjoy the comfort of occupying 100% of his/her own house and the associated neighborhoods in Toronto for the next 5 years and more.Innovations could indeed continue to make our world even flatter!

From the providers’ delivery perspective, on the Canadian side, the Ontario Provincial Government or Toronto Municipal Government could channel the net positive monthly subsidies from an “economic landlord” investor which it has a separate SwapRent (SM) contract with to this Toronto homeowner. The Toronto homeowner could then use part of these net monthly proceeds he/she has received from the local government to become the “economic landlord citizen” in Australia.

On the Australian side, the State Governments of New South Wales and Victoria, their housing agencies, or the Municipal Governments of Sydney and Melbourne could administer these SwapRent (SM) programs for their local residents. Among many other sources, they could even have a SwapRent (SM) contract with this Toronto homeowner directly to treat him/her as an “economic virtual citizen” of their cities and channel these net positive monthly subsidies to many other homeowners in their cities who may be in need of these monthly subsidies through another SwapRent (SM) contract or a HELM contract.

For better managing the homeowner counter-party credit issues, the best way would be for the municipal or state/territory and provincial governments at different geographical locations to communicate with one another for managing the credit risks of both “economic tenant” homeowners and “economic landlord” investors in their cities, states or provinces in order to make sure only ethically responsible and economically eligible law-abiding citizens get the chance to participate in these reciprocal programs.

These new social innovations derived from the cross-city and cross-border aspects of the SwapRent (SM) business provide certain privileges to people who behave in a morally decent way in our civilized human economic societies and are definitely not meant for everybody in every city around the world. Local governments’ active participation and proper regulations could ensure that will remain the case.

In this way, the Australian state/territory or municipal governments could simply accomplish their goals of providing housing affordability to their local low income families or other homeowners in need without having to resort to any of their own local taxpayer’s money since the money will be provided from private free market sources that may include both foreign or domestic institutional investors and the individual “economic virtual citizens” of their municipalities.

In addition, by being the middlemen to administer these SwapRent (SM) programs, the local governments could generate a reasonable fee to enhance the local governments’ own finances for offering these services to their local real citizens and many virtual citizens around the world so that they could reduce the local property and other tax burdens to their own local residents.Wouldn’t this be a better free market based alternative addition to offer housing affordability that could discourage the abuse of irresponsible borrowing and lending in the various national housing finance systems for the future of our capitalism society?

The Company

Advanced e-Financial Technologies, Inc. (AeFT) is a California corporation established since November 2000. The company’s mission is to provide financial and technological innovations to better the lives of the citizens around the world by wealth creation and preservation through prudent risk management strategies and techniques.

Through many of its subsidiaries,,,,, and SPIS (SwapRent Property Indexing Services) AeFT has been regarded as one of the major providers of financial innovations in the new emerging real estate derivatives industry since 2001. AeFT currently holds the intellectual property rights to all these new inventions.

AeFT’s team, which possesses the best knowledge and expertise from the amalgamation of seasoned professionals in financial, real estate and IT industries, is dedicated to provide our customers with the ultimate financial services satisfaction with the highest integrity.

SwapRent (SM) Technical Info and Pricing Examples

The following information was written for banking regulators, consumer protection agencies, and finance industry professionals that may include structured derivatives bankers, financial engineers and risk management specialists for their advanced understanding on how these new instruments and their markets would operate and could be best managed. It is not meant for the average consumers and therefore it may appear overly complicated.”SwapRent (SM)” is a new invention of an alternative way between the buying/selling and the renting of a real estate property for property owners. The idea is to provide a very simple way in the mind of the property owners to let them protect the gains in their home or commercial property equity value.

As long as a property owner has the mental capability to sign a contract to purchase a house or to sign a lease to rent an apartment he or she will have the ability to sign a SwapRent (SM) contract in order to stay out of the price fluctuation of his/her home or a commercial building that he/she owns for a short or long period of time. The homeowners or commercial property owners do not need advanced knowledge or education in derivatives or any other sophisticated institutional capital markets instruments in order to make the SwapRent (SM) transactions.SwapRent (SM) has two major roles in the new real estate risk management industry – one is to act as a superior OTC property derivatives instrument in the inter-bank and institutional dealing community, the other is to act as bridge between the esoteric institutional derivatives market and the vast consumer finance market.

As a result SwapRent (SM) was also intentionally designed to be a consumer-oriented financial product to be offered to the retail consumers such as homeowners or commercial property owners of office buildings, apartment complexes, warehouses, retail shops, … etc., for them to use as a simple hedging tool.

At the same time SwapRent (SM) could also allow investors to use the same service (in an opposite position) to establish an exposure in the potential property value appreciation or depreciation of a particular type of properties in a particular neighborhood. Banks could be engaged to either be the middlemen in between the property owners and investors or simply as credit guarantors.

The business idea is to design and create a very simple concept and method for property owners to simply “rent” (“SwapRent (SM)”) (to pay a “rent” or to pay a “SwapRent (SM)” to stay in) their own house for a certain period of time and therefore to achieve the objective of not having a potential loss or gain in their home equity value during that same time period, while continuing the existing legal ownership.

Currently the only business method available to a property owner to lock in the gains or loss in the home equity value is to do a “sale and lease back” transaction. This includes the real sale transaction and the renting from the new owner of a house that the property owner had been occupying.

The high transactional cost associated with it as well as the tax and legal considerations are usually the deterrents for property owners to widely accept it as a temporary tool for the purpose of simply locking in the financial gains or loss for a specified period of time. Using exchange traded futures and options could be another way but it does not offer a necessary close hedging ratio and the method is way too complicated for most normal homeowners without advanced derivatives knowledge and experience.

From the consumers’ perspectives, SwapRent (SM) is a synthetic version of “sale and lease back” that only captures the economic benefits of a “sale and leaseback” without the legal title transfer, triggering of tax events or the associated high transactional brokerage cost.  Despite its unique capability to enable the unsophisticated homeowners or commercial property owners to enjoy the economic benefits of the derivatives market due to its simplicity and user friendliness SwapRent (SM) is by no means just a retail product. Its institutional uses far out rank the currently existing instrument such as a TRS or PRS. From a technical stand point, SwapRent (SM) is like a synthetic “rent’ or “yield” for properties, similar to the concept of the lease rate trading for gold.

Through the SwapRent (SM) trading we could develop a fixed vs. floating synthetic property “yield’ swap market itself for both the residential and the commercial properties. The floating SwapRent (SM) market could connect to the current PRS market if they both use the same granular like-kind property neighborhood indices introduced here. The fixed SwapRent (SM) market will be able to provide much more useful information such as implied forward price information for properties. That is the relationship dictated by the interest rate parity.

Through the unique REIO (Real Estate Index Options, i.e. AG and DP SwapRent contracts) trading the options market could be easily developed first and hence the information about implied volatilities. Trading forwards and options will no longer remain wish list items or simply punting games among speculators if they are developed using this systematic SwapRent (SM) approach. The current “forward start” TRS or PRS contract is not really a true traditional forward contract.

In addition the main arguments for liquidity is that through SwapRent (SM) trading arbitrage opportunities could exist when SwapRent (SM) levels are compared to the actual rental levels in the real world of the similar like kind properties in the same neighborhoods, for both residential and commercial properties. The existence of arbitrage opportunities is vitally important in growing any new derivatives markets.

As a derivatives instrument, SwapRent (SM) could be used with any kind of property price indices or no index at all (by using appraisal or real transaction prices). However, the special usefulness of SwapRent (SM) for hedgers could be demonstrated when a special set of granular indices is created. These granular indices are based on a concept of the weighted average price information per square area of the “smallest definable neighborhoods of like-kind properties” and their aggregates in any country. This methodology is called SPIM (SwapRent Property Indexing Methodology).

Here below is what some house price index based SwapRent (SM) rates might look like for a sample local city and how they could be collectively determined by the market participants of homeowners and investors.

As of Friday October 12th, 2007, given the then negative sentiment for the near term outlook on US residential real estate, a SwapRent (SM) market rate levels (mid-point between bid and offer rates) for MSA (Metropolitan Statistical Area) of Los Angeles could look like the following as one of the arbitrarily suggested example scenarios for illustration purpose only:

1Y        2Y        3Y        4Y        5Y       …..      10Y        15Y        20Y
15%     10%     5%        3%       2%      …..      1%          0%        -2%

If the Mortgage Funding Cost (MFC) stays the same at 5% for all maturities, it means the annual subsidies from the “economic landlord” investors to the “economic tenant” homeowners (i.e. the MFC minus GSR, the Generic SwapRent (SM)) are as follows:

-10%     -5%     0%        2%       3%      …..      4%         5%         7%

The break-even points for the investors of cumulative general US residential real estate market appreciation (negative sign means depreciation) represented by the MSA level property index are when these indices will have to go up by this amount (without considering compounding and the time value of money for illustration simplicity):

-10%     -10%   0%        8%       15%     …..      40%       75%      140%

Since SwapRent (SM) rates capture more than the information of the current physical rental rates in a given neighborhood or city in the real world and it also reflects the market expectation of the expected return from the price changes during the holding period, the very high Generic SwapRent (SM) rates for the shorter maturities indicate the extreme bearishness in the US residential real estate market at the moment.

As long as the drop in prices at the end of the contract period as represented by the local MSA index does not go below 10% for a 1-year contract the investors will come out ahead. The same is true for the cumulated returns for a 2-year contract. The flat annual subsidy and expected return for a 3-year contract simply indicates that people may think the market could recover to where we are at today in 3 years’ time. Starting from a 4-year contract there will be positive annual subsidies for the homeowners, ditto for the even longer term maturity contracts.

As could be seen by these examples, the supply and demand as well as the general market expectation will drive where the Generic SwapRent (SM) rates could be traded in a given local market although they will also be bound by any risk-less arbitrage opportunities that might exist.It also illustrates that in the current environment if the homeowners want annual subsidies such as in the case of the defaulting subprime borrowers whose ARM rates had been reset higher may need to commit to longer terms contracts, say 4 or 5 years and longer in order to attract investors’ interests.

The homeowners could always unwind their SwapRent (SM) positions that were built in their SwapRent (SM) embedded mortgages after one or two years for the remaining maturities whereas the market levels and the general real estate market sentiments may have already changed by then.

These examples only serve as an illustration of how the trading mechanics of the Generic SwapRent (SM) rates could be like under the current bearish market outlook for the US residential real estate market. It could change drastically when the market sentiments change, just like how market rates behave in any other financial markets.

If the SwapRent (SM) markets had been implemented and made widely available soon enough, a general US real estate market recession could well have been avoided. This should easily be understood since if the existing lending banks start offering these 5-year or 10-year SwapRent (SM) contracts soon enough to the distressed homeowners, these borrowers would have been able to avoid defaults, foreclosures and held on to their homes.

Massive foreclosures could have been avoided or at least be postponed for another 5 years, 10 years or longer. So there would not have been massive selling pressure in the real estate market and of course the market would have been able to hang on without a major collapse.

Public Blog Sites on SwapRent (SM)

  • “Ralph Liu’s Clever Idea: SwapRent”, Business Week Hot Property Blog, Posted by Peter Coy on October 11th, 2007.
  • “SwapRent: Is This A Viable Program for Homeowners and Investment Institutions?”, Real Estate Blog, Posted by Tyler McKenzie on October 10th, 2007.
  • The SwapRent (SM) Blog – The Official Blog Site of the New “Economic Renting” Concept through SwapRent (SM) Transactions, March 29th, 2008.
  • “Own-to-Rent with a Twist”, Economics of Contempt, May 30th, 2008.
  • “Real Estate Derivative Markets: Why We Need Them”, Economics of Contempt, June 3rd, 2008.
  • “Introduction to SwapRent: If debt-to-equity swaps work for banks, why not for houses too?” by Felix Salmon at Market Movers,, October 3rd, 2008.
  • “Beyond Uncle Sam’s Big Bailout”, Capital Commerce by James Pethokoukis, US News and World Report, October 6th, 2008.
  • “Ralph Y. Liu: 12-27-08 SwapRent and Economic Stimulus Plan”, Financial Economics Today – Wayne Marr, Professor of Business Administration, School of Management, University of Alaska at Fairbanks, December 27th, 2008.
  • “Could SwapRent stop the foreclosure crisis?”, BankThink, Published by American Banker, Posted by Emily Flitter on April 14th, 2009.
  • “SwapRent: Ralph Liu’s Mortgage Innovation”, But Then What Blog by Tom Lindmark, July 20th, 2009.
  • “SwapRent: An Alternative for Saving Underwater Homeowners”, But Then What Blog by Tom Lindmark, August 10th, 2009.
  • “FARMing Out The Housing Crisis”, Guest Post at Nakedcapitalism by Leo Kolivakis, Pusblisher of Pension Pulse, August 14th, 2009.
  • “FARMing Out The Housing Crisis?”, Leo Kolivakis, Pension Pulse, August 14th, 2009.
  • “Alternative Housing Finance: How Does “SwapRent” Work”, by Larry Doyle at Sense on Cents and Daily Markets on August 24th, 2010   Web Sites; Sense on Cents, Daily Markets.

Academic Papers and Industry Reports That Referenced SwapRent (SM)

  • “Consumer and Mortgage Credit at a Crossroads: Preserving Expanded Access While Informing Choices and Protecting Consumers”, Joint Center for Housing Studies, Harvard University, Eric S. Belsky and Ren S. Essene, Last Revised on February 26, 2008, UCC08-1 (page 55).
  • “Identifying, Managing and Mitigating Risks to Borrowers in Changing Mortgage and Consumer Credit Markets”, Joint Center for Housing Studies, Harvard University, Eric S. Belsky, Karl E. Case and Susan J. Smith, February, 2008, UCC08-14 (page 36 & 37).
  • “Homeownership 2.0”, Northwestern University Law Review, Lee Anne Fennell, Professor of Law, the Law School, University of Chicago, 2008 (page 1048).
  • “Housing Risk”, Susan J. Smith, Professor of Geography and a Director of the Institute of Advanced Study, Durham University, Durham, England, the United Kingdom ( ). This paper appears in Amin, A., O’Neill, M., Daya and Brown (eds) (2009) Thinking about almost everything (Profile Books) (page 2).
  • “Note to Kyle – Revised Toward a Model Forecasting House Price Turning Points”, by Maury Seldin, Advanced Studies Institute, Weimer School of Advanced Studies in Real Estate and Land Economics, Homer Hoyt Institute, April 2008 (page 1).   Homer Hoyt Institute Web Link.
  • “Rethinking the Risks of Home Ownership”, Susan J. Smith, Beverley A. Searle and Nicole Cook, Department of Geography, Durham University. Jnl. Soc. Pol., 38, 1, 83-102, Cambridge University Press, 2008. (page 98).
  • “Milken Institute Events – Financial Innovations Labs”, Chaired by Glenn Yago, October, 2008 (page 1), Milken Institute Web Link.
  • “Leveraging Bailout Funds with an Old Idea – Shared Appreciation Units”, Norm Miller and Michael Sklarz, University of San Diego, Burnham-Moores Center for Real Estate, November, 2008 (page 1).
  • “Borrowing to Live – Consumer and Mortgage Credit Revisited”, Nicolas P. Retsinas and Eric S. Belsky, Editors, Joint Center of Housing Study, Harvard University, 2008 (page 55).
  • “Subprime Mortgage and Securitization: A Brilliant Idea for Widening Access – What Went Wrong and What Can Be Rescued?”, A Presentation by Professor Charles Goodhart, Financial Markets Group, London School of Economics, January 2009. (page 10).
  • “Game-Changers: New Financial Products and Platforms for Uncharted Territories”, by John Jay, Senior Analyst,  Aite Group, April 6th, 2009 (Subscription, page 4 – 7).
  • “Innovative financing for homeownership: the potential for shared equity initiatives in Australia”, by Simon Pinnegar, Hazel Easthope, Bill Randolph, Peter Williams and Judith Yates for the Australian Housing and Urban Research Institute, AHURI Final Report No. 137, August, 2009 (page 72, 98), The Australian Policy Online web site.
  • “Private sector home affordability strategies progress”, Structured Credit Investor, Issue 155, October 7th, 2009.
  • “A new beginning”, Islamic Home Finance, Islamic Business and Finance, Oct 09, Issue 46, CPI Financial, November 2nd, 2009, CPI Financial web link.
  • “The Unbounded Home – Property Values Beyond Property Lines”, by Lee Anne Fennell, Yale University Press, 2009 (page 268).
  • “Managing Financial Risks: From Global to Local”, Edited by Gordon L. Clark, Adam D. Dixon, Ashby H. B. Monk, Oxford University Press, 2009 (page 256).
  • “Modelling Price Movements in Housing Micro-Markets: Permanent and Transitory Components in Local Housing Market Dynamics”, RICS Research Report; Michael White and Neil Dunse, Heriot-Watt University, Scotland; Patrick Wilson, University of Technology Sydney, Australia; Ralf Zurbruegg, University of Adelaide, Australia, July 2009 (page 7).
  • “A New Concept Aims to Help Resolve Problem Loans”, by Bonnie Sinnock, National Mortgage News, March 10th, 2010, Web Version.
  • “The SwapRent (SM) Transactions for Homeowners, HELM and FARM – A New Alternative Housing Finance System”, Housing Finance International (HFI), the Quarterly Journal of International Union for Housing Finance (IUHF), Brussels, December 2009. (The new issue is for IUHF members only and there is a moratorium for public access currently in place. Please contact the publisher for a copy., Editor’s Introduction
  • “Swap Specialist Tries Novel Strategy”, Hedge Fund Alert, Harrison Scott Publications Inc., April 14th, 2010 (page 6).

Frequently Asked Questions:

All earlier original FAQs written in 2006, 2007 and 2008 have been transformed into blog posts at the Blog.

Patent pending under Advanced e-Financial Technologies, Inc. (AeFT, Inc.). Copyright AeFT, Inc. 2006, 2007, 2008, 2009, 2010, 2011. All rights reserved. SwapRent (SM) is an officially registered service mark of AeFT, Inc. under USPTO. FARJHO (SM), InvestorsAlly (SM) and Cash Flow Sharing (SM) are currently pending registered service marks of AeFT, Inc.

This site was started on May 19th, 2006 for prior art search and quotation purposes. Ideas, concepts and patentable business methods contained in this site belong solely to the author.

Reprints and quotations without prior permission for academic purpose are OK as long as proper citations of this web site and due idea credits to the author are provided. A courtesy notification of such uses would be expected and appreciated. Please direct all correspondences to

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