Introduction to SwapRent (SM) -
            A New Alternative for Property Owners and Investors
          US Patent Application Pub. No.: US2007/0244780 A1, Pub. Date: October 18th, 2007
          PCT/US2007/007094, 22.03.2007; (WO/2007/111928) 04.10.2007; National Phase Info

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 new Islamic housing financial system based on a flexible and reversible
shared economic ownership structure made possible by the new "economic owning and renting
concepts" as facilitated by SwapRent (SM) contracts are located at the SwapRent (SM) Blog.

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

This newly invented economic concepts of "economic owning and renting" 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 5.0. This 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 mortgage structure could be created. It could be
universally offered to both Muslim and non-Muslim consumers. Ideologically, however, it may be
more appealing to the Muslim population since there is no Riba concept, the burdening of people
through borrowing and lending, involved in this exciting new housing finance product innovation.

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.

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
at the time. That goal is what the SwapRent (SM) market was designed to achieve. 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.

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 their children 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, actually 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 expressed in 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. It offers a much better alternative to a reverse
mortgage for the seniors.

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.

As a simple application example, 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 over-leveraging 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, REIDeX.com, SwapRent.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.

“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 is 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 bring the unsophisticated homeowners or commercial property
owners into 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 SwapRents) 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 indices. 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).

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.


                               Frequently Asked Questions

(Only original FAQs between June, 2006 to December, 2007 are listed below. FAQs from 2008 and
onwards have morphed into blog postings in the SwapRent (SM) Blog.)

FAQ #1: How will SwapRent (SM) and its embedded mortgage product (HELM) help the
current defaulting subprime and other mortgage borrowers?

SwapRent (SM) is basically the realization of economic renting while keeping legal ownership for
homeowners. It allows the property owners to switch between owning and renting economically in a
freely traded market any time they want while keeping the 100% legal ownership of the properties
they bought. Homeowners make that decision to switch based on a couple of economic factors.
One of them is the cost of owning vs. renting.

The answer to the perennial question of to buy or to rent varies as time evolves. Some time the
rental rate is higher and more expensive than buying, other times the reverse is true. 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 of owning a property, a way to continue the legal ownership
and economically switch between owning and renting only economically according to the market
conditions. That goal is what the SwapRent (SM) market was designed to achieve. In addition, the
economic renting provided by SwapRent (SM) will also alleviate the "moral hazard" issues that real
conventional renting usually entails.

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 products in the US that
have been around for decades in other countries such as the UK. SwapRent (SM) and its related
consumer finance products were originally created to replace those conventional shared equity or
appreciation mortgage products, by the way.

Now that they were already hooked as owners and the banks and the RMBS investors are also
hooked by hoping that they would continue to be owners it appeared to be OK for a while. But that
will not be the case when the interest rates increase or after the rates reset. So instead of letting
them default or foreclose which will trigger the real estate market decline and RMBS investor
losses etc. SwapRent (SM) could let them afford to continue to legally own and avoid default /
foreclosure by economically switching them back to be renters temporarily until the market
condition recovers later on. They could switch back to be full owners until SwapRent (SM) contract
expires or when they want to unwind or cancel the contract any time before maturity when they
have more income later on.

The market will decide where the Generic SwapRent (SM) rates are in a given neighborhood or
city. It should be very close to the real average rental rates in that neighborhood to avoid risk-less
arbitrage opportunities. The rates will vary according to the maturity terms, i.e. 2, 5, 10, 15 years ...
etc.

As illustrated in the presentation slides, for a HELM if Generic SwapRent (SM) rate could be at 2%
as a starting point and the current mortgage funding cost is at 5% for a 5-year example. There will
be an annual 3% differential between the rental payments and the mortgage payments (without
even considering credit spread and impound). That means the rental cost is still affordable but the
increased mortgage payments after reset on their ARMs are not. Their real mortgage payment rate
could actually be 6% or 7%. That is actually why we are having this subprime crisis at the moment
to begin with. So if we could switch them back to the more affordable renting only economically for
a period of time they will be able to continue to keep legally and stay in their homes and thus
avoiding foreclosures.

If the Generic SwapRent (SM) rates start trading higher in the future due to supply and demand,
there will always be FVCMs for the homeowners in which they will be able to change the upside vs.
downside ratio through AG and DP SwapRent (SM). That will be left to the bankers to figure that
out in order to create enough monthly subsidy to let them avoid default/foreclosure. The
homeowners do not have to understand how that works internally. Free market competition and
regulatory supervision will make sure bankers do not over charge like in any other businesses.

Again, SwapRent (SM) is basically the economically synthetic version of the traditional "sales and
lease back" transaction. It only transfers the economic interests while the homeowners continue to
own 100% of the legal title of their homes. It allows the homeowners to switch between owning and
renting only economically during the contract period while maintaining the entire legal ownership.


FAQ #2: What do the borrowers have to do to initiate the SwapRent (SM) transactions?

Although there are many ways of implementation, in its most basic form, all the homeowners need
to do is to tell their existing lending bank what percentage (e.g. 50%, 75% or 100%) of the value of
their house they would like to turn into economic renting (i.e. being the renters of their own homes)
and for how long (e.g. 2, 5, 10 or 15 years etc.). That's it. The bank will then convert their existing
mortgages into HELM or FVCM to accomplish all that with very little or no cost to the homeowners
(up to the lenders). After underwriting that new HELM or FVCM the banks will then use SwapRent
(SM) to lay off their property value risks with the investors through the inter-bank market. The
factor for the current defaulting mortgage borrowers in subprime or Alt A sectors to make that
decision of what percentage and how long is how much monthly subsidy they'll need to offset the
increase in monthly payment from the old mortgage rate resets to avoid foreclosure.

Even as simple as that one would imagine there will be a lot of homeowners and investors
educational work that needs to be done. Any innovation will require educational work. That is a
very good thing. Introducing these new mortgage products will not just help homeowners hold on to
their homes and bail out investors, it will also help many Americans keep their jobs, and even
create new types of jobs in the mortgage industry, real estate industry, the banking and the
investment advisory industry (as illustrated in the slide #6 in the presentation file). This is also what
our economy desperately needs now, to keep those American workers involved in the already
impaired mortgage and financial services industries employed. Financial sophistication has its
advantages. The need to educate the homeowners and investors will create many more jobs in our
economic society.


FAQ #3: What's in it for the investors?

From the investors' perspective, they will be paying the 3% subsidy o the homeowners every year
in exchange for the upside appreciation potential (and the downside depreciation risk at the same
time). In the presentation slides the value used for Generic SwapRent (SM) rate (GSR) in a sample
neighborhood is 2% with the mortgage funding cost (MFC) being 5% as a starting example. Each
will be driven by supply and demand sentiments in their respective traded markets. So the subsidy
is 3% every year for the homeowners to switch to economic renting as I mentioned. If the GSR
trades up at 3% by supply and demand factors and the MFC remains unchanged then the annual
subsidy will be 2% .... etc.

So the investment decision for investors is very simple. Using annual 3% subsidy as in the existing
example, the cost for a 5-year SwapRent (SM) contract is 15% (or ~16% considering
compounding), total subsidy for 5 years. If he/she thinks the potential appreciation will be higher
then it is a good investment for him. For the 10 -year SwapRent (SM) contracts, he can compare
the potential appreciation he feels and the cost of 10-year subsidy of ~30% etc.

The SwapRent (SM) based approach is a true capitalism solution to our current economic
problems. No charity or spending taxpayers' money necessary when it comes to rescuing anyone
negatively involved in these subprime related problems currently.


FAQ #3a: (inserted on October 12th, 2007, not in a sequential order) What could SwapRent
(SM) rates for a sample local city look like and how will they be collectively determined by
the market participants of homeowners and investors?

As of Friday October 12th, 2007, given the current 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 synthetic "economic landlord" investors to the synthetic "economic tenant"
homeowners (i.e. the MFC minus 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.   

The point is that if the SwapRent (SM) markets have been implemented and made a wide spread
reality soon enough, a general US real estate market recession or even depression could well be
avoided. It could easily be understood since if the existing lending banks start offering these 5-year
SwapRent (SM) contracts soon enough to the defaulting homeowners, the borrowers would not
have to default now (nor ever later on, as explained below ... ). Massive imminent foreclosures
could be avoided or at least be postponed for another 5 years or longer. So there would not be
some massive selling pressure in the current market and of course the market will be able to hang
on without a major collapse. It almost sounds like a self fulfilling prophecy .....  but it is so true.


FAQ #4: Does the concept still work when house price decline has already eliminated any
equity left in the homes?

The key difference between the SwapRent (SM) approach and conventional shared equity or
shared appreciation finance products (like those practiced in the UK and just got started in the US
and Australia recently) is that the SwapRent (SM) based approach does not require any existing
home equity. There could be a positive amount, zero or even negative home equity amount when
the homeowners decide to use SwapRent (SM) embedded mortgages. It does not matter because
they will not be sharing any existing home ownership with anyone in a legal contract. They remain
100% home ownership throughout the SwapRent (SM) contract period.

The homeowners will only be giving up partially or entirely the "future potential appreciation" which
may or may not even be realized in the future. That "potential" could be monetized into a present
payments to be received by the people who are willing to give it up, partially or entirely. They also
get partial or entire future downside depreciation protection at the same time in a Generic
SwapRent (SM) application.

It is easier just to think that once a homeowner decides to temporarily switch to the SwapRent (SM)
based economic renting of course he will not have any future financial appreciation or depreciation
anymore, just like a conventional renter economically. It does not matter how much home equity he
has left at that moment when he decides to start using SwapRent (SM).

They can switch back any time they want to economically own the property again. In this way the
rich or high income people would love it too since they get to be protected from the downside
depreciation risk. Being a renter for a period of time will naturally avoid the depreciation risk during
that time period.

The current conventional renters can also receive SwapRent (SM) payments and become a
synthetic "economic landlord" in order to protect themselves from the future upside appreciation
risk since they are currently renting only. If property prices go up it would not be good for them in
the future. For example, if renters in LA or DC had used this SwapRent (SM) instrument 5 or 6
years ago they would not have felt being priced out of the market now when they decide to
buy and own property now.

The reason why that doing this could help the current defaulting mortgage borrowers now is that
renting has become less expensive than owning once again since the interest rates have risen or
been reset higher. So if the borrowers agree to switch back to renting economically temporarily, the
synthetic "economic landlords" will be willing to make up the cost difference (3% annually as in the
example in the slides) to them in monthly payments during the contract agreement period so that
they can continue to service their mortgage payments to avoid default and foreclosure. The
mortgage borrowers will get to keep and stay in their homes, as though they are renting their own
homes for this contract period. They can decide to switch back to economically owning again
whenever they will have higher income to pay for it or when interest rates become lower again later
on to make the cost of owning less expensive.


FAQ #5: How will the implementation of SwapRent (SM) and its embedded new mortgage
products of HELM and FVCM help the current RMBS or related CDO holders?

The licensed SwapRent (SM) embedded mortgage product HELM or FVCM from the financial
institution providers' perspective is a wrap-around package of a contingent 2nd mortgage (not
exactly a HELOC as the pricing method should be totally different from traditional HELOC) and the
original 1st mortgage which could have already been sold or securitized that the lending bank is
still servicing. The only situation there would be a pay-down of the principal of the original 1st
mortgage is when the property value declines as measured by the index used at the end of a
SwapRent (SM) contract. There is no restriction what-so-ever currently in any of the mortgages
which had already been sold and securitized to receive the pay-down of principal. If the property
values goes up at the end of the SwapRent (SM) contract then there is nothing needs to be done
with the original 1st mortgage that they have been servicing. Therefore it does not matter if the
original mortgage loans had already been sold and securitized to implement HELM or FVCM.

This is also why and how the implementation of SwapRent (SM) and its embedded new mortgage
products with the original existing lenders could save the current distressed ABS, RMBS or CDO
investors around the world and stop the subprime or Alt A contagion from spreading further into the
entire global credit markets.


FAQ #6: Why will SwapRent (SM) help improve the quality of the neighborhood of a typical
public low-income housing complex?

The 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.


FAQ #7: How can the government agencies or government sponsored enterprises get
involved actively to help curb the negative effects to our economy by the mortgage
default and foreclosure problems?

The reason why a government-led effort is urgently necessary is due to the disconnect of the credit
risk holders and the original mortgage lenders/servicers as a result of the mortgage securitization
process. With the excuse of maximizing their shareholders' value, lending banks could be well
justified to have no urgency to do anything to fix the problems and are literally fire watching while
Americans are losing their homes, workers are losing their jobs and investors are filing bankruptcy.
Fed jawboning may not have any effect to solve this unprecedented problem in our financial history.

SwapRent (SM) is basically the economically synthetic version of the traditional "sales and lease
back" transaction. It only transfers the economic interests while the homeowners continue to own
100% of the legal title of their homes. It allows the homeowners to switch between owning and
renting only economically during the contract period while maintaining the entire legal ownership.

From a technical stand point, SwapRent (SM) is a quantifiable instrument which extracts out the
property value risk component of these mortgage loans and allow the lending banks to pass these
extracted property value risks on to other investors. The remaining mortgage loans will have no
property value risks left. These could all be done simply within the new HELM and FVCM which the
defaulting borrowers could convert to with their existing lenders.

The homeowners could economically give up partially upside appreciation potential of their homes
for only a short period of time, which may or may not even be realized in the future for them to
economically receive a monthly income. They can use that income to pay for the higher reset
mortgage payments and therefore get to avoid foreclosures. Again the homeowners maintain 100%
legal ownership through out the contract period. To solve the current mortgage default /
foreclosure problems we will need to tackle the problem at its root, a long term economically
sensible and fair way to let more low income Americans afford homes. Property value itself
provides the new dimension to do so where interest rate has already ran its course. Using subsidy
to the low income people at the expense of the average tax payers will not be a sustainable long
term solution under our capitalism system.

The key to the success is to let the financial institutions offer these new opportunities to the
homeowners in a very careful, open, conservative and controlled way. Both the providers and the
homeowners will benefit from it and hence our economy will remain safe and sound.

The FHA or the GSEs can utilize this new solution in a variety of ways. One of the simplest way is
to set up a "homeowners rescue fund" to establish a long term real estate recovery investment
position by receiving SwapRent (SM) from the homeowners and paying them monthly subsidies
(3% annually in a 5-year SwapRent (SM), as in the example in the presentation slides) so that they
would not have to default. Better still, FHA could team up with investment firms in private sectors to
set up these funds.

In this way, FHA and the GSEs can simply offer guarantees to those existing lending banks and let
them to allow the defaulting borrowers to convert to HELM or FVCM. These guarantee will have
very little cost to FHA and the GSEs since it will only happens when the real estate indeed
recovers many years later after the underlying SwapRent (SM) contract expires. It would also save
FHA and the GSEs a lot of admin hurdles and save the homeowners from the added cost of going
through a refinancing.


FAQ #8: Could you run a numerical example on how a defaulting ARM borrower whose
rate has been reset higher in either the subprime, Alt A or prime sectors could be rescued
from being foreclosed?

Maybe the best way is to follow through the examples on the presentation slides #2, #5 and #7. So
let's say a lending bank has a defaulting ARM borrower. If the bank offers him a 5-year SwapRent
(SM) to give him $2,000 monthly subsidy for his $800,000 house so that he would not have to
default and be foreclosed now. The bank gets to postpone the costly foreclosure to begin with and
therefore we could avoid a whole real estate market collapse for now. However, the value the
SwapRent (SM) contract provides is more than just postponing. Chances are the homeowners will
never have to default irrespective of what happens in the future. So 5 years later, there could be
three scenarios, (a) the property stays at $800,000, (b) the property values goes down, say to
$600,000, and (c) the property goes up in value , say to $1,000,000.

Under scenario (a), the homeowners simply pocketed all the monthly subsidy for the 5-year period.
Nothing needs to be done now and the contact expired. He can sit tight or renew another contract
at his will. Under scenario (b), the investor will have to cut a check of $200,000 to pay to the
homeowners through the bank. The HELM contract requires that money be used to bring down the
original mortgage borrowing amount of $400,000 down to $200,000 (in reality more like $170,000
considering principal pay-down during the 5 year period). So even if the interest levels will be high
at that time his mortgage payments will be low since the principal amount has dropped down to
$170,000 instead of the $400,000 beginning amount. He can therefore avoid the default even if he
decides to do nothing next. Under scenario (c), the property value increased to $1,000,000 as
determined by the neighborhood or city property price index. That means we will have a bull real
estate market. Most likely there would have been a low interest rate environment right before the
SwapRent (SM) contract expired so that the real estate market was pushed higher by this low
interest rate environment. So even with a higher principal amount now ($570,000) chances are that
the homeowners will be able to lock in a long term fixed interest rate which is affordable to him now
and therefore avoiding default. He does own a house that is worth $1,000,000 now so there is no
real economic loss to him and his job is more secure since the economy is strong due to this bull
real estate market.

Even under an extreme unlikely 4th scenario that the property prices are sky high with a sky high
interest rates (a hyper inflation situation where the capitalism system basically is on the verge of
failing), the homeowners can still renew another long term SwapRent (SM) to get enough subsidy
so that he can stay in the house until he dies or he decides to sell the house in the future. If the
Generic SwapRent (SM) rates at that time does not generate enough subsidy, there will always be
FVCMs for the homeowners in which they will be able to change the upside vs downside ratio
through AG and DP SwapRent (SM) so they he could generate enough up-front subsidy. This
leveraging economic concept will be getting closer to what the current market demand for the
reverse mortgage products is now, although one is interest rate based and the other is property
value based. With reverse mortgages the homeowners will definitely lose their house at the end of
the contract but with leveraged SwapRent (SM) contract they may still own it in whole at the end of
the contract.


FAQ #9: Would the use of a property price index as recommended instead of appraisal for
house valuation purpose create any basis risks for the homeowners?

The basis risk as conventionally known in the hedging using derivatives on other types of assets
takes on a little bit different meaning when it comes to real estate properties. This is simply
because people actually use by living in their properties but not their stocks and bonds. They can
easily control the alpha of the properties they own but not that easily the alpha of the stocks and
bonds that they have invested in.  

First let's consider the trade-off between hedge ratio and the trading liquidity. Homeowners
obviously will get a 100% hedge ratio if we use an individual property appraisal basis but there will
not be much trading liquidity in order to create a market for lenders to lay off the property value
risks to the investors. A market will not be able to develop on each individual property risk. Even if
it is on a pooled basis in a residential trust or a fund it still lacks the efficiency of a freely tradable
market.

There will also be many moral hazard and home improvement credit issues that have plagued the
conventional non-derivatives based shared equity or shared appreciation mortgage markets
experimented briefly in the US but have been around in the UK for decades. It never took off in a
big way what it actually deserves in the UK primarily due to these issues. So an index-based
derivatives approach have its obvious advantages over these conventional shared equity finance
products. SwapRent (SM) and its embedded new mortgage products of HELM and FVCM were
originally created as alternatives or replacements for these older shared equity/appreciation
finance products.

So the key question is how do we create an ideal set of property price indexes that could satisfy
both the hedge ratio demand for the homeowners and the trading liquidity requirements for the
investors to make this new methodology commercially viable under the free market mechanism.

Although SwapRent (SM) and its related consumer finance products are index neutral, i.e. they
could be used with any set of property price indexes or even without an index (on actual appraisal
basis) we have developed a theoretically perfect set of property price indexes for this application
purpose. There is a whole section (SPIM) in the business product white paper devoted to the
discussion of these issues with detailed descriptions which I will not repeat here. More detailed info
could be made available upon request. Although the SPIM represents an ideal way by drilling down
to the neighborhood levels (the smallest definable neighborhoods of the like-kind properties) it may
take a long time to create these new indices from scratch again and get the market acceptance and
confidence. Due to the crisis nature at the moment of the potential subprime borrowers application
we have simply been recommending the use of the city level OFHEO MSA HPI since it is already
well known to the mortgage industry professionals. It may not give the homeowners the 97% to
99% hedge ratio but a 90% to 95% or even a 85% to 90% correlation may be good enough and on
the other hand, the investors will have no problems holding a city level property value risk since
there will be liquidity to trade it away if the market conditions command so.  

What a more fundamental new economic concept is that these basis risks derived from the use of
an index actually helps the homeowners. 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). Again 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 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 legal own it no matter what happens next with the real estate markets in general.
They will only give up the neighborhood appreciation/depreciation represented by a neighborhood
or city property price index. Whatever home improvement investment they have already made in
the properties they will be able to get to recoup those home improvement investments when they
actually sell the properties later on.  

In the extreme worst case that the neighborhood or city level index has appreciated more than the
homeowners' own houses have they would have nobody else to blame but themselves because
they have not been able to maintain their houses the way they were supposed to. This is simply
universally true with whatever properties people may own. If they did not do the necessary upkeep
and maintenance so that the properties deteriorated and dropped in value they would not be able
to put the blame on anybody else. This will give people the incentives to fix up their houses and do
good things to improve their own neighborhoods relatively to the city or the nation. This is exactly
what the city urban planners need to accomplish to let citizens enjoy the community smart growth
which will lead to prosperous societies.

Therefore the basis risk is really a fortune in disguise when it comes to the use of property index
based house valuation in SwapRent (SM) related transactions.


FAQ #10: What economic theories might be applicable behind the SwapRent (SM)
concept?

It has been proven in the recent human history that the socialist or communist economic system
has never done a better job than the capitalism system to foster economic prosperity for our
societies. Nor has any of the communal shared equity schemes under our capitalism system been
ever proven to be a long term viable solution to the bottom half of our economic societies. To begin
with, being a renter to a landlord or a serf to a master landowner does not provide the social
respect or prestige to motivate people to work harder to maintain the property or to generate
productive resources on the land. If the working members of our society are contributing and
earning an income they should be entitled the opportunity to become homeowners, irrespective of
how much they are earning. So if every working member earns at least the minimum wage he or
she could be entitled to be a homeowner. SwapRent (SM) could help them afford the homes of his
or her choice and continue to provide the incentives to work harder to improve the potential
financial rewards by retaining both the entire legal and a larger part of the economic ownership.

It could be easily understood that in a society that if the less affluent all have permanent homes
instead being members of the mobile population there would be much less crimes and conflicts in
that society. People will get to treasure and love their homes and neighborhoods since they are the
legitimate owners of the properties. SwapRent (SM) will be able to facilitate that and allow them a
stable base to continue to pursue other wealth generation opportunities which would most likely be
more legitimate than otherwise by being homeless drifters.

The ease of use, simplicity to understand, convenience of expressing a market timing view,
reversibility, notional amount flexibility and transparency etc. that a local SwapRent (SM) market
offers makes it a much better way to offer the housing affordability. Other than the affordability
benefits that a local SwapRent (SM) market provides the other major economic function is to allow
property owners to hedge the financial values of the properties they already own and/or the
properties they intend to own in the future. That is why high income earning wealthy people would
also be able to benefit from the development of a local SwapRent (SM) market in their
neighborhoods or cities.

It is very easy to understand that the property owners could use SwapRent (SM) contracts to
protect the downside depreciation risks like financial insurance contracts. By switching to economic
renting through using Generic SwapRent (SM) they would be acting like conventional renters
economically and will not be subject to any downside depreciation risks. They would still be able to
enjoy unlimited upside appreciation potential benefits if they simply use the Depreciation Protection
or DP SwapRent (SM) instead of the Generic SwapRent (SM) contracts.

As explained above, the current conventional renters can also receive SwapRent (SM) payments
and become synthetic "economic landlords" in order to protect themselves from the future upside
appreciation risk since they are currently renting only. If property prices go up it would not be good
for them in the future. For example, if renters in Southern California had used this SwapRent (SM)
instrument 5 or 6 years ago before the prices ran up sharply within the past few years they would
not have felt being priced out of the market now when they decide to buy and own properties now.
They would still be able to enjoy unlimited downside depreciation benefits when they plan to buy in
the future if they simply use the Appreciation Give-up or AG SwapRent (SM) instead of the Generic
SwapRent (SM) contracts.

The bottom-line is that the versatility of the SwapRent (SM) contracts will not only help the working
poor to afford and hang on to their homes, it will also allow the smart rich to become even richer
based on their financial acumen and diligence. Therefore both the Democrats and the Republicans
should love the development of this new economic concept of SwapRent (SM)!  


FAQ #11: How can the existing banks and mortgage lenders find the SwapRent (SM)
receiving "economic landlord" investors to pass on their real estate exposures so that
they could offer these advantages to the defaulting homeowners for them to avoid
foreclosures and hang on to their homes?

Providing trading liquidity for SwapRent (SM) contracts is what REIDeX is set up to do. Matching
buyers and sellers (SwapRent rate receivers and payers) often sounds like a chicken-and-egg
problem. However, the current mortgage default crisis seems to have made the answer rather
simple.

The banks who are currently holding the defaulting mortgage loans do not have to go far trying to
find other investors and hope for a quick fix that somehow others may want to clean up their mess
for them for some magical unknown reasons. The quashed hope and failed attempt of trying to sell
even more toxic securities to more innocent foreigner investors in a "Superfund" could attest to this
point well. The lending banks themselves could actually be the best temporary "economic landlord"
investors. By receiving SwapRent (SM) payments and paying MFC (in effect granting monthly
subsidies to homeowners) to rescue these mortgage loans from defaulting it will certainly beat
holding the physical individual REOs (Real Estate Owned, i.e. bank-owned properties) and
trashing their mortgage loans in an actual foreclosure scenario. This is especially true when there
are negative equities already in many of these defaulting properties (more explanation on this later).

In a free market investors will only come to them when there are no more foreclosures and forced
sales in the future automatically, without a government intervention scenario. Nobody will be silly
enough to come to them to solve their problems and buy away their problems for them at the
current time when there is still a lot of future uncertainty, unless the price levels of these physical
REOs or SwapRent (SM) contracts are so low that the investors think they could get a steal in a
deal which could somehow overcome these future uncertainties.

The main advantage of using SwapRent (SM) contracts vs. buying REO foreclosed properties for
investors hoping for long term returns is one of those common economic advantages of using a
derivative contract. SwapRent (SM) by nature could lock in a longer term returns (say 3, 5 or 10
years). Without the SwapRent (SM) contracts, the real estate investors will have to wait for a long
time before they would consider coming back to buy in the spot market when they think the housing
market bottom has been reached. By using SwapRent (SM) contracts they could come in to buy
today because a.) they do not have to wait for an unknown market timing bottom to buy as they
could simply profit from long term recovery without a precise entry point; b.) they do not have to
wait for 5 or 10 years to realize their views for an eventual recovery are correct as they would have
to if they had bought the physical individual REOs; and c.) they get to avoid the high transactional
cost associated with buying the physical individual REOs. Six months, one year or two years down
the road when the sentiments have changed it will be reflected in the pricing of these SwapRent
(SM) contracts of similar remaining maturities already. The "economic landlord" investors could
easily take profit on their views at that time already, with a much lower transactional cost as well.

That is why for the banks and mortgage lenders who act as temporary "economic landlord"
investors will have a much better chance (and at a much better price level) to offload these long
real estate exposures through the city level price index based SwapRent (SM) contracts than the
physical individual REO bank owned properties. By curbing further foreclosures through SwapRent
(SM) contacts it will also provide the stability and hence the future certainty that average investors
are typically looking for.

As for those mortgage loans that had been securitized into MBS/CDOs, the credit risk
holders/investors of these securities could simply set up a joint real estate recovery fund and
implement the same strategies through and with the original lending banks and/or their mortgage
servicers. Through cherry picking in the implementation order, this "economic landlord" fund will
receive SwapRent (SM), pay MFC and thus provide netted monthly subsidies to those
homeowners whose mortgages had been securitized into the MBS that the investors own so that
these homeowners won't have to default. In effect, the MBS/CDOs holders will simply swap a major
part of their credit risks of holding these securitized mortgage loans into a purified liquid form of
transferable and quantifiable market risks through the SwapRent (SM) contracts, which will be
much easier and cheaper to offload than the physical individual REOs. Meanwhile, the value of the
MBS/CDOs the investors are currently holding will recover in a very big way, once the default /
foreclosure possibilities of the underlying mortgage loans have been completely removed, or at the
minimum, postponed for 5 or 10 years.

This again, is especially true in the current environment when more and more properties fall into
negative equities, i.e. the unpaid balance of the loan amount is higher than the market value of
these properties. Whereas fresh third party investors may not be able to benefit from the recovery
of the negative equity which is associated with the existing first mortgages so easily, the existing
credit risk holders of these existing first mortgages will have all the incentives to potentially recoup
their mark-to-market negative equity losses first and then benefit from the potential appreciation
from the 2nd contingent mortgages that are typically built into HELMs, the SwapRent (SM)
embedded new mortgage products. Otherwise they may have to take current losses and end up
with maybe only a few cents on the dollar when the properties are foreclosed and sold into an
already depressed market where negative equities already pervasively exist.  

The total cost to the banks and mortgage lenders is also much less in the SwapRent (SM) scenario
than for the physical REO scenario, especially when the holding cost of these REOs is taken into
consideration. They key thing is that the foreclosures have been avoided all together in the
SwapRent (SM) scenario. Homeowners will get to keep and stay in their homes and investors will
no longer suffer any losses on the mortgage loans or MBS/CDOs. In fact the investors may even
enjoy a gain because the real estate market risks have been taken away from these mortgage
loans.

After the market scare has calmed down, the mortgage loans and related derivatives will have
recovered in a big way and will become saleable at a much better price level. The lenders could
sell them or securitize them again if they want to. Business will be operating as usual again. Later
on they could make the decisions at their pleasure on whether to continue to hold on to these long
term recovery (5 or 10 years) residential real estate property exposures expressed in the city level
SwapRent (SM) contracts all across America. Since the dark clouds over the real estate markets
will have already been over many traditional long term investors such as private pension funds,
state public employees and teachers pension funds and insurance companies may step in and bid
up the prices of these SwapRent (SM) contracts again. The speculators and hedge funds will also
become itchy and eager to get in as well, and voila, the crisis will be all over. Free market
capitalism will once more triumph again.

The point is, there may not seem to be a need to waste time now begging for investors,
governments, tax-payers, foreigners or any others to help the lending banks or MBS holders solve
their mess. If the original or the current existing lending banks and their servicers simply start
offering SwapRent (SM) contracts and/or the SwapRent (SM) embedded mortgages (HELM) to
homeowners to use them as an economic version of holding the traditional physical REO
properties without the actual foreclosures their problems could be solved automatically. The initial
cost to them is much lower as compared to any of their other alternatives. They could easily afford
it by themselves temporarily to get the programs started. The various third-party investors may
come in droves even without invitations once the market has been restored to normal.

This will happen once homeowners get their fair monthly subsidies through the SwapRent (SM)
contracts or the embedded mortgages (HELM). All defaults and foreclosures could be avoided
immediately. If there are no defaults and foreclosures, there would be no more investor losses, no
more credit crunch, no more turmoils in the financial markets and our nation will get to avoid the
severe social and political consequences down the road ...


All FAQs more recent than the original postings in 2007 have been moved to and will be
chronologically continued as blog posts at the SwapRent (SM) Blog.


                          Public Blog Sites on SwapRent (SM)











                         Academic Papers and Industry Reports
                             That Referenced SwapRent (SM)











Patent pending. Copyright AeFT, Inc. 2006, 2007, 2008, 2009. All rights reserved. SwapRent (SM)
is a registered service mark of AeFT, Inc. This site started on May 19th, 2006. Reprints and
quotations without prior permission are OK as long as proper citations of this web site and due idea
credits to the author are provided. A notification of use would be highly appreciated.