0901 2012 New non-debt financing alternatives for homeowners and small businesses as an economic stimulus tool – the crowdfunding of a FARJHO homeownership structure or a SwapRent contract

This is a topic that I have published and blogged about (see historical blogs on these issues at http://swaprent.com/blog) many times before within the past 6 years since the creation of SwapRent in 2006 and FARJHO in 2009. The more I blogged about it each time through the years, the more it seems that it has carried on much more new meaning as our country’s economic situation evolves. With the recent fast paced development of the crowdfunding movement, the potential crowdsourcing availability of the funding for the new FARJHO homeownership structure and the SwapRent home financing method have become more and more relevant.

Let me start out by repeating the urgent need of developing a few new non-debt based financing alternatives, not only just to reform our country’s housing finance system for the sake of increasing affordable home ownership, but also to help create economic stimulus and create jobs for middle class Americans on Main Street.

Debt should not be the only way to finance home ownership but unfortunately mortgaged homeownership seems to have been the only consumer choice made available to the American people for centuries until today. We will need to educate the public, the academic, the government agencies and the lawmakers alike to help create the conducive regulatory structure, make available and foster the growth of the free market, non-debt based financing alternatives for both homeowners and property owning small business proprietors.

Without going into technical details, both the SwapRent and FARJHO business methods were simply created to realize the common economic concept of property equity sharing or property appreciation sharing. SwapRent took one step further by not only being just a new method to implement an old concept, but also introducing a new economic concept altogether. Instead of sharing up-front equity to realize sharing appreciation profit potential and the associated downside risks, SwapRent uses a cash flow sharing concept and method to let investors share potential upside appreciation in property value and the downside risks of losses with the property owners directly via a online portal marketplace REIDeX.com.

More detailed info on the SwapRent original creation process in 2006 is available at https://www.box.com/s/437c60e4d8931365b9e4 and on SwapRent application in the 2009 JHFI (Journal of Housing Finance International) by IUHF (International Union of Housing Finance) paper at https://www.box.com/s/feae725ede7042c53412 .

Within the past few years, the current administration has repeatedly called for the creation of green jobs to help revitalize the national economy while the opposition party plans to create the same old black jobs by trying to do more fracking of we homeowners’ backyards. Irrespective of the debate outcomes on what kind of green, black, pink or blue jobs to create, the 64 thousand dollar question is still on how to come up with additional money to fund new jobs creation via creating new economic stimulus. It is really the greenback, not the green jobs, that is going to get us out of the current economic dilemmas.

While the Monetarists at our Federal Reserve Board propose we continue to print more greenback, Keynesian economists believe we could continue to shanghai the Chinese to cough up more money to finance our national debt in order for the policy makers to conduct more conventional government led fiscal stimulus projects, Solyndra included.

Perhaps, it is time for these policy makers to think outside the box now. What if, just what if, we could create a new free market based business method that could provide fresh new capital into our economy by encouraging free market investors to voluntarily pump their own money into the system, not for charity, but for the potential possibility of making financial profits from the long run recovery of the US economy, materialized through the increased property value of homes and real estate properties throughout the country that they got to “partially” own when they voluntarily agreed to pump their money into our economic system.

Since neither the new alternative housing finance system of SwapRent or the new home ownership structure of FARJHO are based on a lending concept but rather a tradable co-ownership equity financing concept to help our nation de-leverage, it does not have to rely on a low interest rate environment to be effective to create jobs and to stimulate our nation’s economic growth. It is in fact neutral to the interest rate levels and it has its own dimension in influencing the macro-economic activities so to speak.

Therefore, once a SwapRent or a FARJHO market has been established, the Fed or central banks in other countries could raise interest rates at any time, as they see fit, in order to prevent growing further asset bubbles, to fight potential inflation or to save the value of the national currency from potential devaluation without having to worry about its potential impact on hurting the chances of an economic recovery.

The relevance of SwapRent or FARJHO to job creations is based on how entrepreneurs and local small businessmen could create new monthly income cash flows by willingly giving up partial future property value appreciation of their own homes or other properties that they own. This potential appreciation may or may not even be realized by the horizon date (e.g. 2, 3, 5, 8 or 10 years from now) given the current economic situation. Through property equity sharing or appreciation sharing to attract fresh capital injection into the local economy, the potential appreciation in property value could actually be artificially created via a self-fulfilling prophecy as more money could chase up the property prices.

The local entrepreneurs could then pool these new monthly cash flows obtained directly from these new programs to say open a new local restaurant together and hire more people to create jobs or to make any other new investments directly right at the grassroots level on Main Street. They would not have to worry about getting this new found fresh capital injection into the local community to be fleeced on Wall Street first or being diverted by some smart bankers to invest in and stimulate other foreign country’s economies altogether simply for personal gains.

These additional monthly income cash flows would become the local home owners discretionary disposable income that would make them the ideal consumers with a new found consumption power to purchase the goods and services from the small business owners in the local communities.

For the existing home or property owners, a 100% ownership of a future zero appreciation scenario by horizon date is still zero, a partial shared 50% ownership of a future 20% or 30% appreciation scenario of their own properties driven by the new fresh capital injection into local communities induced by the SwapRent program or the FARJHO new homeownership structure will translate into a 10% or 15% (one half of the 20% or 30% total appreciation) gain for themselves.

It would seem a much better deal to co-prosper rather than being left poor alone. Meanwhile with the new swapped current monthly income streams they could enjoy perhaps an additional flat screen TVs purchased at local malls for their family, leasing another new electric hybrid car from local car dealers or eating out more at the local restaurants that the local entrepreneurs had just opened by using the new cash flows obtained through these same SwapRent programs. Wouldn’t this be the American way as usual on a pure free market basis without having to pile up any more debts or to raise citizen’s taxes?

In terms of helping reduce the current foreclosure rate, the homeowners who see the signs of an imminent swift recovery of the local property market will think twice about their earlier plans to walk away from their distressed homes. The only way for homeowners to feel that they should not purposely make a strategic default and walk away from their properties seems to be to somehow make them feel that they might be missing out on a swift recovery if they do walk away, another free market decision making process.

The key new economic concept for these proposed programs to work well is for the policy makers to change from a socialist oriented ideological focus on preferential rescue treatments for distressed homeowners that may most likely cause moral hazards, to “a free market based reversible exchange transaction of a part of future appreciation potential of the properties that they own for a perhaps very generous current monthly income cash flow now” offer which is open to all property owners and may be expediently targeted at a few specific high concentration foreclosure-infected neighborhoods that the banks may have exposures to for the best initial pilot project demonstration effect.

In a sense, the more participation by local property owners and free market investors to the SwapRent program or the FARJHO method the more additional fresh new capital would be injected into the local community through the new third party economic landlord investors. That is exactly the reason why these new innovative programs will have to be open to all property owners to participate without discrimination for the long haul, not just for the distressed homeowners on a short term rescuing mentality. Open up more innovative ways to let the free market forces rein and the economic prosperity will happen at its own swift pace.

If the government wants to take a token leadership, all the government policy and lawmakers need to do is to create law and order to become a good game keeper of these new proposed housing finance system and business methods, no tax payer’s money would ever need to be involved.

Based on pure free market principles, the more people there are in the “targeted neighborhoods” to sign on to this new program the more likely the local property markets and the local economic prosperity will indeed recover and the more likely free market based investors will step on each other’s shoulder to rush to inject fresh new fund into the local communities directly through this new free market mechanism. As a result the more the SwapRent contracts or FARJHO co-ownership member interests will indeed appreciate in value due to the property market recovery that will hence reward the initial SwapRent monthly cash flows or FARJHO up-front equity providers. This new economic concept of a farming approach to wealth creation is indeed a self-fulfilling prophecy in the true spirit of capitalism. The more you sow, the more you might reap.

Wealth creation by enhancing property value in this equity based manner is by no way creating malignant asset bubbles again. Low interest rates will. Malignant asset bubbles are formed when buying interests were created from using borrowed money (or OPM, other people’s money) where owners have an on-going obligation to service debts. The SwapRent or FARJHO approach by nature is based on a tradable economic version of the shared equity financing concept. Equity financing means that owners do not have to service any interest burden of debts. Therefore the benign asset wealth value created this way is not like leveraging created malignant asset bubbles made up of hot air that are usually doomed to burst. The analogy could be more like igneous rocks cooled from molten lava for equity based asset bubbles. This is simply the inherent more stable nature of equity financing vs. debt financing.

When these new alternative tradable equity based home financing objectives have been met, residential real estate properties or homes ownership will soon join corporations to become the dual engines of economic growth of our capitalism society, one for small business and the other for big business. Home financing through debt alone can not make that dream happen, as has been clearly illustrated by the current housing led financial crisis.

Without the stabilization factor of equity, debt financing only creates boom and bust cycles. Therefore instead of a policy of continuing to push banks for more loose credit at this very moment to repeat what had brought us here to begin with, it may make better sense for our government to consider helping the private sector entrepreneurial entities look for new ways to increase the shared equity-based home financing by creating more conducive legal and regulatory framework to let free market forces help our economy prosper.

Filed under: Cash Flow Sharing, Crowdfunding, Economic Viewpoints, Equity Sharing, FARJHO, Federal Government, Housing, InvestorsAlly, Mortgage, PeoplesAlly, SwapRent, Crowdfunding, Crowdfunding of home equity, Equity Sharing, FARJHO, Fiscal policy, Housing finance, InvestorsAlly, Monetary policy, REIDeX, shared appreciation, shared equity, SwapRent

Crowdfunding of Home Equity at FARJHO.com – How crowdfunding could help solve our country’s housing finance problems

This blog post first appeared in Huffington Post on 8/7/2012. http://www.huffingtonpost.com/ralph-liu/how-crowdfunding-could-he_b_1752633.html

Ever since the JOBS Act was signed into laws by President Obama on April 5th this year, the enthusiasm on crowdfunding has mushroomed in just about every corner of America. Many people with some technical Internet knowledge would rush in to start a crowdfunding portal to help American create more jobs through helping entrepreneurs raise equity financing. Many more are anxiously waiting to utilize the new found channel to raise money for their own business start-ups from regular investors over the Internet.

At InvestorsAlly’s FARJHO.com, we have coincidentally also been trying to provide the matching services between aspiring home owners and prospective joint property investors to co-own homes through a new innovation home ownership structure called FARJHO (Flexible And Reversible Joint Home Ownership) over the Internet within the past few years.

The concept of connecting consumers directly via Internet used be to called a Peer-to-Peer (P2P) method of matching individual consumers with similar desire to consummate a transaction of a common interest, be it a dating service or a financial transaction. Going back a little bit further to the 90’s, this matching of retail consumers directly through the power of the Internet used be more popularly categorized simply as the Consumer-to-Consumer (C2C) e-commerce. So crowdfunding appears to be nothing more than another jargon as the latest variation in the evolution spectrum of the Consumer Internet service, although technically speaking it is more a Business-to-Consumer (B2C) e-commerce since the relationship seems to migrate from a one-to-one to a one-to-many relationship. The new break-through to suddenly let out the pent-up interests in crowdfunding is really on the regulatory side. Kudos to those visionary law-makers!

As for the coincidental parallel innovation on the housing finance side, FARJHO is a new way to implement the old property equity sharing concept that has been around for more than 30 years, although primarily more popular in the UK. Those older equity sharing methods did have many growing pains and never made it to the mass consumer market. Inventions in social sciences would provide new economic values just as technology inventions do. The distinguishing features of FARJHO as a new business method to implement the equity sharing concept are three-fold:

First, FARJHO allows renter/home occupier and joint property investors to own only one home at a time in order to maintain the sanctity and the freedom of the single family residence ownership. This is in sharp contrast to many community oriented equity sharing methods of Co-ops, Land Trusts, Kibbutz or hippy-ish Commune types of older equity sharing methods.

Second, as a brand new concept, FARJHO introduces and allows only member level debt financing to eliminate the foreclosure possibility which exists with the conventional property level debt financing that are commonly used by a Shared Equity Mortgage (SEM), a Shared Appreciation Mortgage (SAM), a Shared Ownership Mortgage (SOM) or any other existing equity sharing schemes to date. In all those older business methods, the home occupiers could still get foreclosed whenever they lose their monthly income capability. The concept of FARJHO is to move people from a Pool-Borrow-Buy (PBB) method to a Borrow-Pool-Buy (BPB) method in joint home ownership.

Third, FARJHO provides a natural built-in buffer to conventional renting to avoid potential eviction when the tenants temporarily lose their monthly income capability. The equity stake of the renter/co-owner of the FARJHO structure could act as an optional voluntary collateral against missed monthly rent payments and therefore provides property investors with enhanced investment security through less credit risks and at the same time provides the tenants/co-owners with more home occupying stability during the rainy days in their working lives.

Although we at InvestorsAlly have received overwhelming positive response and a very strong market demand from home owners under our various educational test marketing programs conducted in Southern California within the past two years, due to the prior securities laws related regulatory concerns, we have not been able to officially market the FARJHO service freely in a massive scale. Now with the new crowdfunding provisions of the recently passed and signed JOBS Act to be enacted by the SEC by the end of the year, we have accordingly been preparing to position and may finally be able to launch our FARJHO.com as a dedicated crowdfunding portal site as the authoritative marketplace for crowdfunding of home equity, one home at a time, through the new home ownership structure of FARJHO. This will be a giant step towards realizing a stock market for home equities.

The reason why this new regulatory crowdfunding business opportunity development could be made possible to be applied to housing finance is that the proprietary new home ownership structure of FARJHO that we have coincidentally been working on for the past few years basically corporatizes each home in America one home at a time. Since each home will be treated as a business venture via a simple LLC legal structure under FARJHO, the new crowdfunding regulatory provisions could therefore be conveniently applied to housing finance for the first time. The reason why we have adopted the LLC legal structure is that using LLC to hold real estate properties is a tried and true method in commercial properties for many decades already, even though they have been used with an opposite purpose to FARJHO as far as leveraging is concerned.

The portal site will provide free membership to homeowners around the world similar to how Facebook does for individuals with all the social networking capabilities but our homeowner members will have a specific hope of selling their homes, buying another new home in whole or in part, investing a small part of a few other member’s home equities as an investment portfolio or simply obtaining occasional short term financing through selling fractional shared equity of their own homes through the new FARJHO home ownership structure.

There could be many more other free market based new consumer choices made available to solve our country’s current housing finance problems by this new FARJHO service to free people up from the current dominant mortgaged home ownership that often results in foreclosures and hence has created many financial problems and social instability to our economic societies. Furthermore, it may lay the proper free market foundation for further future benefits to grow upon with even more innovations that we could not even foresee at this moment.

For example, the use of property equity sharing as a temporary non-debt based financing alternative for small businesses to obtain funding to created jobs, the use of property equity sharing or cash flow sharing concepts and methods for the governments as a new third alternative economic policy management tool (vs the existing fiscal and monetary policies) to provide stimulus or to slow down an overheated economy, … etc. (more detailed policy tool examples are available in Chapter 6 of the SwapRent application paper at https://www.box.com/s/feae725ede7042c53412 )

FARJHO.com aspires to become the first entrepreneurial venture to bring new housing related economic benefits via crowdfunding to the American consumers under strictly free market principles by harnessing the power of social innovations, Internet technology advancements and the timely regulatory foresights.

A copy of the original FARJHO creation white paper could be downloaded through this following link. https://www.box.com/s/cc0de069ab5c3fd3007e

Filed under: Cash Flow Sharing, Crowdfunding, Economic Viewpoints, Equity Sharing, FARJHO, Housing, InvestorsAlly, Mortgage, PeoplesAlly, SwapRent, Cash Flow Sharing, Crowdfunding, Crowdfunding of home equity, Equity Sharing, FARJHO, FARJHO.com, Housing finance, InvestorsAlly, PeoplesAlly, shared appreciation, shared equity