Introduction to the Innovation Trio on Real Estate Ownership
1. SwapRent (SM) - Cash Flow Sharing concept and method
2. FARJHO (SM) - A new method for Equity Sharing
3. TARELV - A new alternative currency pegged to real estate value
to replace the existing fiat currency concept and Chartalism
- New Alternatives for Property Owners, Investors and Economic Policy Makers
- Sharing Appreciation through Sharing Cash Flows in A Real Estate Property
- 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
US Patent Application Pub. No.: US2007/0244780 A1, Pub. Date: October 18th, 2007
On SwapRent (SM): "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).
On FARJHO (SM): A draft paper of a collection of various FARJHO (SM) related idea innovations.
The new home ownership structure of FARJHO (SM) corporatizes or securitizes single family
homes one home at a time and hence made it possible to conduct Peer-to-Peer (P2P) Matching
between aspiring home owners, existing home owners and joint property investors, or simply
Crowdfunding for Home Equity. For more info on this new scaled-down simplified single property
syndication process of American homes, please visit the home equity crowdfunding portal site http:
//farjho.com or the affiliated homeowners social networking portal site at either http:
//WeHomeowners.com or http://Wehomeowners.org. Here is the link to a copy of InvestorsAlly's
FARJHO (SM) flyer.
On TARELV: http://www.TARELV.com. TARELV is an academic project to develop a new
alternative currency or foreign exchange rate pegging system based on the total aggregate real
estate and land value of a sovereign community.
All new concept developments on SwapRent (SM) and FARJHO (SM) 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 SwapRent.com 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 FARJHO (SM) and SwapRent (SM) presentation file Version 8. 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
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 http:
//www.InvestorsAlly.com. 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 http://www.PeoplesAlly.org 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
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
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)
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?
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, REIDeX.com, SwapRent.com, TARELV.com, InvestorsAlly.com,
PeoplesAlly.org, FARJHO.com, WeHomeowners.com, WeHomeowners.org, CrowdfundersChoice.
com 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
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
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
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
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
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)
Academic Papers, Press and Industry Reports
That Referenced SwapRent (SM)
- "Housing Risk", Susan J. Smith, Professor of Geography and a Director of the Institute of
Advanced Study, Durham University, Durham, England, the United Kingdom ( susanj.
email@example.com ). This paper appears in Amin, A., O’Neill, M., Daya and Brown (eds)
(2009) Thinking about almost everything (Profile Books) (page 2).
- "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. http://www.housingfinance.org) Editor's Introduction
Frequently Asked Questions
All earlier original FAQs written in 2006, 2007 and 2008 have been transformed into blog posts at
the SwapRent.com Blog.
Patent pending under Advanced e-Financial Technologies, Inc. (AeFT, Inc.). Copyright AeFT,
Inc. 2006, 2007, 2008, 2009, 2010, 2011, 2012. All rights reserved. SwapRent (SM), FARJHO
(SM), InvestorsAlly (SM) are officially registered service marks of AeFT, Inc. under USPTO. Cash
Flow Sharing (SM) is currently pending registered service mark 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
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