Posts Tagged ‘Economic Policy’

02/27/2011 FARJHO and the “corporatization” of American homes – yes, but only one home at a time and no “corporate debt financing” necessary

Sunday, February 27th, 2011

Although these issues have been discussed before, I would like take a moment to clarify these concepts about FARJHO a bit further on this quiet Sunday morning.

The LLC legal entity structure is merely a convenient way for implementing the FARJHO concept and method for applications in the US. LLC is only a means to an end, not an end itself. In many other countries or autonomous economies the FARJHO method could be implemented through a variety of other local legal structures, most notably, a “trust” structure of some sort.

Two of the most important unique features of FARJHO should always remain the same in order to be called a FARJHO, i.e. first, FARJHO owns one house or condo at a time, and second, no more borrowing at FARJHO legal entity level.

The first feature requires that the legal structure we could use to implement the FARJHO concept and method under whatever legal jurisdictions should not hold more than one home.

The second feature advises that, there should better be no more borrowing once the FARJHO legal entity that holds the property is formed. The potential participants of a FARJHO, i.e. the JPIs, or even the AHO, could borrow to their hearts’ content before they come to the table to form the FARJHO structure but once the FARJHO is formed there should better be no more borrowing at the legal entity level to use the property itself a collateral in order to ensure that the possibility of foreclosure of the property to endanger the homeowners’ occupancy rights and neighborhood’s stability would no longer exist.

Any leverage-loving speculative investors who tried to achieve high leveraged returns as they were often used to do in real estate investments in the past could drop off individually if and when they ever lose their monthly income capability to service their own individual debts. They could go away quietly by liquidating their own member interests in the FARJHO legal structures without affecting the stability of the home occupier/partial owner of the FARJHO structure.

Therefore, many of the conventional reasons why people normally would incorporate a business activity do not necessarily apply to the FARJHO concept to own homes. By those standards, the LLC application of the FARJHO method in the US would therefore also vary drastically from the reasons why many people in various countries have been using something similar to LLCs or a TIC (tenancy-in-common) structure to own a commercial property or a group of properties in the past. The reasons of the conventional use of LLCs or TICs by the commercial property investors have usually been to facilitate borrowing and to shield the individual members from personal liability of the debt. If the real estate market goes sour, the idea for them is to get the lenders to hold the bag and the property investors could simply walk away and have the property foreclosed.

The purpose of using LLC to implement FARJHO on residential properties one home at a time can’t be farther way from those punting purposes. The main purpose of FARJHO is to use the legal structure to implement the equity sharing purpose only. The corporate level financing would be turned off in order to kill the possibility of foreclosures to ensure neighborhood stability and social harmony.

From this angle, it is also the very reason why that FARJHO is drastically different from all kinds of residential applications of the “equity sharing” concept, such as SAM (Shared Appreciation Mortgage) or SEM (Shared Equity Mortgage) that have been practiced in the UK and a few other countries for over past 30 years already. It is pathetic to see how the press allow some old school economists to have an eureka moment to discover the old “equity sharing” concept and promote those old and obsolete methods that have already been proven not working for over 30 years.

In any case, in order to appreciate the beauty of FARJHO, one may want to focus on the bottom-line economic benefits inherent in this innovative concept and methodology. The legal structure and/or the tax advantages are only secondary or tertiary considerations and should never be the driving force or motivation of why people would embrace the new FARJHO method. The economic advantages such as those built-in incentives to upkeep the property derived from the partial ownership by the renter of the same property that he/she occupies, the detachment of the sheltering functions from the management of the investment functions of a property ownership as well as the elimination of foreclosure possibility etc. are truly universal, no matter what prevalent legal structures and/or tax rules a country may happen to have.

I have expressed before my disdain about those financial innovations aimed at or designed only to circumvent the legal structures or to dodge any particular potential tax liabilities by those hacker financial engineers and/or bonus driven investment bankers. Their intelligence and hard work should better be re-directed to creating something truly original that could provide some real economic benefits to our human society. Otherwise, those genius efforts wasted on designing tax advantaged products could at most out smart some of those incompetent law makers or crony politicians. No respect from me on that. The effort may probably be better spent on simply voting those cronies and the ruthlessly taxing government officials out of their offices directly.

Therefore, tax rules in many countries would indeed evolve to direct the societies towards more economic equalization and social harmony by future proposals made by more intelligent and responsive public servants in the future, given the more and more people power provided by the modern transportation and telecommunication innovations. Unintelligent, bureaucratic governments and autocratic policy establishments would no longer be able to hang on for long since there is no way for them to stop the vast consumers to be educated and learn what is best for them in this modern era. They’d better learn to accept new economic concepts and methods way before their electorates do.

We have fortunately received very good interests from many senior foreign central bankers and high-level foreign government officials regarding the academic concepts and models of SwapRent(SM) and FARJHO(SM) over the past few years. Academically, there have also been many graduate level researchers doing their research thesis on the feasibility study of locally implementing the housing finance innovations of SwapRent(SM) and FARJHO(SM) in a few countries at the moment.

We can’t wait to focus our resources on the potential implementations in those foreign countries as well after we have successfully launched these innovative housing finance and home ownership structures in the US. Many FARJHO(SM) projects overseas would be conducted on a not-for-profit basis through PeoplesAlly.org.

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02/20/2011 It is not Keynesian. It is not Monetarist. Perhaps we could call it SwapRentism? Any better suggestions?

Saturday, February 19th, 2011

I would like to revisit the topic of “SwapRent as A New Alternative Economic Policy Management Tool for Governments” that was published at Larry Dolye’s blog, Sense on Cents – Navigating the Economic Landscape, on August 24, 2010.

The proposed concepts and methods in that article were first mentioned in my previously published article in the quarterly journal Housing Finance International of IUHF back in December of 2009. The essential points are that through the newly invented “Cash Flow Sharing” method of a SwapRent(SM) contract, Government could act as a conduit to channel private sector’s capital into local neighborhood communities as a new way of stimulating our national economy aimed directly at homeowners and small businessmen at the grassroots level.

It could bypass banks, Wall Street fat cats or any other types of financial intermediaries to avoid money being hi-jacked by them again. It could also be done totally without further leveraging with more debts. Free market based investors from around the world would get to enjoy the future partial “Shared Appreciation” of the properties in those neighborhoods that they have chosen to invest in, like a conventional equity investor on any other assets would.

This free market based economic stimulus solution is based on the true meaning of capitalism to solve the current economic ills of the Western economies by using a creative and innovative method based on the simple “Shared Equity” or more precisely, a new variation of a “Shared Cash Flow” economic concept.

No taxpayer’s money would be involved for economic stimulus so it would not increase any more budget deficits and hence, non-Keynesian.

No debt capital would be involved to inadvertently blow up further other asset bubbles either (like those unwise and fateful QEs would) and hence, non-Monetarist.

There is a need to create a new name for this kind of new economic concept and new business method to conduct economic stimulus activities to manage a country’s economy. The convenient name I came up with is simply “SwapRentism” at the moment. I would welcome any other suggestions for our consideration.

It is an unconventional and innovative method of plain equity capital based economic stimulus program for various levels (federal, state and municipal) of governments to adopt. It could also be used in conjunction of any other conventional economic stimulus programs to avoid political or personal ideological resistance.

The old time economists and behind closed door economic policy makers may have to swallow their pride, come out of their cocoons, open up their minds and learn something new, for the benefits of our human societies.

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09/03/2010 The polarization of American economy – from fictitious housing affordability to fictitious economic recovery

Friday, September 3rd, 2010

While short term floating rates, teaser rates and subprime mortgages had contributed to the fictitious housing affordability with Wall Street’s promotions and the politicians’ blessings, historians in the future will realize the illusionary nature of the currently touted fictitious economic recovery when they examine the legacies of the policies of the current Administration and the Fed. A strong stock market and bubble-like bond markets built by near zero interested rate Fed policy have created the mirage necessary for politicians to temporarily hang on to their jobs.

As the near zero interest rates have made the Wall Street bank fat cat even fatter day by day, leading US corporations have made billions due to low borrowing cost in the US and cheap labor cost overseas, small businessmen and local property owners in America could not even borrow to survive and local residents could not hang on to their old homes or to borrow to buy new homes, the fundamental economic structure of the US has been going through a fundamental paradigm shifting polarization. The wealth has become more unevenly distributed at a historically unprecedented proportion.

A big portion of our GDP and consumer consumptions were indeed created by those elite segments of our economy that circle around fortune 500 corporations, big banks, Wall Street firms. It is quite amazing and ironic to realize that this phenomenon has been partly created and further exacerbated by the Democrat Party controlled Administration.

It seems to be a case of a lack of intellectual capability, constructive attitude rather than political ideologies. Many of these old school economic policy makers and advisors may need to be re-tooled and recharged and have an open mind to learn and adopt new innovative solutions to keep up with the time. Fighting an evolutionary trend of new ideas by playing ostrich will not be the solution for long. New ideas will catch on with or without them.

From the macro-policy standard point, keeping extremely lower interest rate levels may only help the big banks and Wall Street firms make more monopolistic money through many no-risk spread trading strategies that include investment strategy as simple as borrowing money from the Fed at near zero cost and invest in US treasury securities and other low risk assets. It is almost equivalent to the license to steal granted by many governments to the well-connected crony oligarchs in many third world countries.

These obsolete monetary policies (by simply moving interest rates up and down) do not trickle down to home owners and small businessmen through more mortgages or business loans offered by credit unions and local community banks. There is an obvious problematic disconnect between the existing monetary policies and our country’s banking credit systems, hence an opportunity for innovative solutions.

For a viable new economic policy management solution through the SwapRent contracts please visit the recent blog by Larry Doyle. http://www.senseoncents.com/2010/08/alternative-housing-finance-how-does-swaprent-work/

There are no better entities and infrastructure than the existing local community banks, credit unions and their industries to implement these new innovative solutions at the grassroots levels so that we could finally take the helm of deciding our country’s economic destiny from those big banks and Wall Street firms back to the risk-taking entrepreneurs and small businessmen at the various community levels and let the American entrepreneurial and hard-working spirits flourish once again to form a more solid economic foundation for our country and to build a more stable and long term prosperity.

Any budding aspiring elected officials with political ambitions willing to stick your neck out? It does not matter whether you are a Democrat, Republican or Tea Party member, our country urgently needs new effective economic policies implemented by whoever can make it happen, irrespective of your political stripes.

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11/08/2009 SwapRent as an economic policy tool – How GSEs could use SwapRent to free up FRB to manage monetary policy more independently

Sunday, November 8th, 2009

In two ways. First as an immediate solution to the current legacy mortgage assets problems so that it could free up the Federal Reserve Board to manage interest rate levels in a more independent way. Second, use SwapRent rates for different contract maturity as a new economic stimulus policy tool going forward to adjust the property value levels as a source of our national wealth that could stimulate or restrain the economic activities in local communities.

There have been many writings in the SwapRent web site or SwapRent.com blog sites about how SwapRent and HELM could be used in a concept similar to a debt-for-equity swap so that homeowners could hold on to their homes and mortgage investors could avoid financial losses. It will not be repeated in details here again. The most direct consequences of this new non-lending but rather co-ownership based housing finance system for GSEs are that homeowners will get to de-leverage through this new realization of the debt-for-equity swap concept, Fannie and Freddie could de-leverage because the mortgage assets would get to be fixed up and sold to other free market investors, and our nation could de-leverage because taxpayer’s money would no longer be tied up to rescue these troubled financial institutions. Nothing is more effective than tackling the problem right at its roots, i.e. to help homeowners avoid foreclosures and design new ways to increase home property value without inappropriate borrowing.

In this blog posting, I would like to focus on the second most important way that a liquid SwapRent rates market could help our nation’s policy makers manage the national economy. Let’s have a quick review what a SwapRent contract is first.

What a SwapRent contract does is to allow both existing and would-be property owners to switch between owning and renting economically back and forth with a very low transaction cost at any time they want for a specified period of time for whatever reasons they may have. Therefore the pricing of a SwapRent contract relies on the cost differential between the cost to own a property (say 5% of the current house value per annum) and the cost to rent a property (say 2% of the current house value per annum) for an intended period of time.

Using the same numerical example of a $800,000 house in Southern California, the annual 3% (difference between 5% to own and 2% to rent) own-rent cost differential will translate into a $2,000 monthly for a 100% “temporary own-rent switching” or “economic renting” for a period of time, say 5 years. That is where the monthly subsidy would come from. Whoever wants to own the future appreciation in 5 years’ time similar to a convention owner will pay the monthly subsidy to the current property legal title owner. For a 50% “temporary own-rent switching”, the monthly subsidy will be only half of that, i.e. $1,000 per month. Therefore the current property legal title owner could still enjoy the remaining 50% appreciation potential, hence the conventional understanding of the “shared appreciation” concept could be more flexibly and reversibly realized by a SwapRent contract.

The cost to own in the Western financial system such as the US is simply to current interest rate level derived from the interest rate term structure. The best proxy for the cost to own in the US is the corresponding Interest Rate Swaps (IRS) rate levels published by the Federal Reserve Board at its web site every day. The corresponding maturity SwapRent rate levels would be determined by participants at REIDeX or the interbank markets.

The Federal Reserve Board could go through GSE such as Fannie Mae, Freddie Mac or even government owned Ginnae Mae and let them act as one of the free market participants to assume the role of the “economic landlord investors” themselves first to provide the monthly subsidy to homeowners. They could alter the supply and demand factors through being either more or less aggressive in bidding for the SwapRent rates in this freely traded marketplace, not unlike how the Fed currently conducts its interest rate policy through the short term repo markets with the banks.

Using the same 5-year contract as the example, if the Government wants to stimulate the local economy at grassroots level it could be more aggressive in granting monthly subsidy through being willing to accept a lower SwapRent rate of 1.5% or 1% (instead of the previous starting point of 2%). Therefore the monthly subsidy the homeowners receive would be equivalent to a higher annual 3.5% or 4% of the current house value instead when the homeowner decides to enter into a SwapRent transaction with the GSE.

As explained many times before, given an interest rate level fixed at 5% for a given contract maturity, the more aggressive (i.e. the more generous) the government is willing to offer the monthly subsidy amount to homeowners in the form of a lower SwapRent rate it is willing to receive, the more likely more property owners in the community will take up the offer as a free market choice, the more people have signed up that would create buying demand the more likely there is a perception that the local properties will indeed appreciate in the future and the local economy will indeed strengthen, the more likely the SwapRent contracts that capture the financial value of partial future appreciation of these underlying properties will then increase in value and the more likely the GSEs could sell them at a higher price to other free market investors in order for the GSEs to regenerate the capital to provide more assistance to other American homeowners to own homes. It is indeed a self-fulfilling expectation and perhaps reality, exactly similar to what adjusting the interest rate levels by the Fed could do to the investment psychology and perhaps reality of our future national economy.

From a local property owner’s perspective, a 100% ownership of future appreciation potential in five year’s time will mean zero financial gains when there is no appreciation at all. There could even be further losses when the property value further depreciates. Sharing and maintaining a remaining 50% appreciation potential in order to help stop foreclosure selling and increase overall buying demand in the local community may still entitle the property owner a 10% gain when there is an overall 20% rise on the value of the specific property or on a house price index. In short, 100% of zero is still zero but 50% of a 20% appreciation will be a 10% gain to enjoy. Not a bad deal when you are also getting paid handsomely every month for that to happen.

The homeowners could do the SwapRent transaction with GSE directly or the GSEs could decide to engage a fee-earning local financial intermediary, housing agency of a local governments etc. in order to better administer and better monitor the on-going credit risks.

The GSE or financial intermediary could also better manage the transaction through converting the homeowner’s existing mortgages into a SwapRent imbedded HELM (Home Equity Locking Mortgage). A HELM could simply take on the legal format of an AITD (All Inclusive Trust Deed) which would be a wrap-around package of the existing first mortgage and a contingent second mortgage that settles the payoff of the SwapRent contract at contract maturity date automatically as the new unpaid balance of HELM at that time, to accomplish all the desired economic outcomes with very little or no cost and admin hassles to the homeowners.

After offering that new HELM to the homeowners either directly or through local financial intermediaries, the GSE itself could then use another new offsetting SwapRent to cancel out the exposure of the embedded SwapRent contract in the HELM in order to lay off their property value risks and appreciation potentials (similar to an equity co-ownership piece) with other free market based investors through the inter-bank market or REIDeX. These ultimate investors of these co-ownership SwapRent contracts could be state and local pension funds, hedge funds, insurance companies, foreign sovereign wealth funds or in short, any free market participants.

As explained before, many state, county and city pension funds could benefit directly by acting as the ultimate “economic landlord” investors to provide the needed monthly cash flows to homeowners for a fair share of the future appreciation potential of the property in return. A successful implementation will not only help many state/county/city treasuries and the state employees’ pension funds with higher returns, but also it may help stabilize or boost the local property value and hence the entire state’s economic prosperity. At the same time, the program will get to accomplish its goal of maintaining social stability through helping the distressed homeowners in their state hang on to their homes very effectively without having to spend any taxpayer’s money for preferential bailout treatments that cause moral hazard and make things worse.

In a sense, as a temporary conduit, GSEs will finally be able to provide funding for American homeownership not just in the form of debt, but also through a new additional form of a non-lending based economic version of tradable home equity co-ownership. The new alternative system could greatly lower the chance of a repeat of the previous subprime mortgage lending abuse fiasco in a purely lending based housing finance system that may often create boom-and-bust cycles and hence social instability.

After understanding the transaction mechanics, let’s take a look at how policy makers could influence SwapRent rates traded in the free marketplace in order to use it to stimulate or restrain economic activities in the local communities through out the country. As explained in blog posts before that in order for the SwapRent market to work as a policy tool the politicians will have to break out of their socialist mentality and treat the new SwapRent program as a 100% free market operation, i.e. let the local property speculators and entrepreneurs participate freely. Make the SwapRent transactions and the monthly subsidy available to anyone who wants it as long as they have a property to be able to share a part of the future upside appreciation with another investor, not just whoever needs it for survival purpose. There should not be any restrictions other than the credit quality, moral, ethical or legal eligibility to participate. Entrepreneurs who are willing to trade off some of the future appreciation potential of the properties they own in order to receive current monthly cash flows so that they could use it to start a new business or to hire more people represent a major target users profile that this SwapRent program is intended to accomplish with.

There are currently many other ineffective bailout plans that create moral hazards by giving preferential treatments to distressed homeowners already in place. That is a good thing since these politicians’ preceptory obligations are done and over with. Now the policy makers could put the free enterprise based SwapRent program in conjunction with or on top of those ineffective bailout plans to really get the necessary work done in order to be able to create wealth again.

So as explained above, when the 5-year IRS rate is at 5%, if the policy makers want to provide stimulus to the local economy they could bid for the 5 year SwapRent rate at 1.5%, 1% or even lower so that the monthly subsidy to property owners is larger (3.5% or 4% of the property value per annum). If they want to cool the heated economy down they could bid for it at 2.5%, 3% or even higher so that the monthly subsidy to property owners is smaller (2.5% or 2% of the property value per annum).

The most important intended concept to illustrate here is that all these could be done irrespective where the current interest rate levels are or will be at in the future. So that when the cost to own or the 5-year IRS rate moves up to 8%, the SwapRent rates would simply move up in tandem and be trading at 4.5% or 4% for a stimulative policy (the same larger subsidy of 3.5% or 4% of the property value per annum) or be trading at 5.5% or 6% for a cooling policy (the same smaller subsidy 2.5% or 2% of the property value per annum).

When the 5-year IRS rate moves down to 2%, the SwapRent rates would simply move down in tandem and be trading at -1.5% or -2% for a stimulative policy (the same larger subsidy 3.5% or 4% of the property value per annum) or be trading at -0.5% or 0% for a cooling policy (the same smaller subsidy of 2.5% or 2% of the property value per annum).

The main point is that the monetary policy of where the interest levels are will no longer be the main driving force of the property value any more. The property value in our nation could be determined in part by the SwapRent rates for local communities that the policy makers could use as an alternative to adjust. That is what it means to offer a new dimension in the economic policy tools for the policy makers. It would not just be the previous only two tools of using monetary policy on interest rates or using fiscal policy on tapping taxpayer’s money anymore.

The Federal Reserve could therefore freely increase the short term discount rates or fed fund rates to curb bubbles from happening in the stock markets, the precious metals markets and the commodity markets in order to avoid a possible run-away hyper-inflation. The high interest rates will no longer hurt the property value or be the sole force to negatively impact the economy anymore as the property value and job creations at the local communities through out the country could be accomplished separately through a very generous co-ownership monthly subsidy offered through influencing lower SwapRent rates in the marketplace by the GSEs. The Fed could finally be freed up to make these monetary decisions on a much more independent basis.

Through influencing the SwapRent rates, it is likely that we may have a double digits long term interest rates to fight inflation and still have a strong property market and a robust economy as the local home value could finally be properly detached partially from the Fed’s short term monetary policies. This is exactly the third dimension as a policy tool that the new SwapRent based non-lending or co-ownership housing finance system could provide as a part of its many advantages.

The beauty of this new SwapRent housing finance system is that capitalism will also be able to best manifest its value and become more politically popular with the mass population as the profit driven motives will allow the Main Street local property investors, speculators and business entrepreneurs at the local community grassroots level, instead of always having to rely on the fat cats on Wall Street as in the past in a primarily securitization based housing finance system, to all participate and to become the locomotive engine to help create wealth for our nation.

Adding this new alternative SwapRent housing finance system would only make everybody happier since it makes not only economic but also political sense due to its inherent more democratic way of wealth sharing capability. By helping create wealth at the grassroots local community level first to drive our country’s economic recovery and growth will certainly help de-polarize the current imbalance and tension between Wall Street and Main Street.

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