Posts Tagged ‘HELM’

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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11/05/2009 SwapRent vs. Fannie Mae’s new Deed for Lease (D4L) program

Thursday, November 5th, 2009

Fannie’s new Deed for Lease program seems to add nothing new from the earlier “Own-to-Rent” attempt or those two Bill efforts by the two Congressmen.

As a refresher, Congressman Raul Grijalva (D-AZ) introduced H.R. 6116, the Saving Family Homes Act of 2008 on May 22nd, 2008, which requires banks to let homeowners rent their own homes after foreclosure. Congressman Gary Miller from California is similarly also contemplating on introducing another Bill again to require the banks to let homeowners rent for 5 years after foreclosure.

We have proposed these SwapRent and HELM related “temporary own-rent switching” and “economic renting” methodologies to Fannie, Freddie, HUD, Treasury Dept., the Fed and Congressmen since mid 2007, with frequent updates through out the past few years. It is great to see that the GSEs are finally moving in the right direction now and they are moving one step closer to the SwapRent concept. The market needs time to learn. Changes usually come gradually but it will get there sooner or later.

The simple question to the executives at Fannie is that why not let those homeowners who have the economic ability to pay the lower monthly rental payments simply do a “temporary own-rent switching” transaction for a period of time before they get foreclosed or DIL’ed? This new D4L effort after DIL would have the same effect of a foreclosure in the sense that it will trash the value of the mortgage in question and hurt the holders of these mortgages anyway. Fannie itself is the owner of these troubled mortgages.

Why wouldn’t they want to save the financial value of the mortgages they are currently holding on these distressed borrowers by adopting the SwapRent contracts instead? It would be able to save plenty of taxpayer’s money by saving these troubled mortgages while accomplishing the same social stability and property maintenance objectives of the Deed for Lease program at the same time.

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10/01/2009 Short term mortgage loans arbitrage trading opportunity through offering SwapRent transactions to homeowners

Thursday, October 1st, 2009

This is an old topic but here it is explained from a sell side broker-dealer’s perspective in order for them to generate more trading commissions from their mortgages or MBS trading clients. The interests from their fund management clients would help generate liquidity of the troubled legacy mortgage assets currently held by the banks, the insurance companies, the fund managers, the GSEs and the Fed.

As an example, either their financial institution or individual clients could act as “economic landlord investors” to offer monthly payment assistance to credit worthy homeowners and enjoy part of the future appreciation of their properties. The homeowners who may want to receive monthly subsidy assistance could be any property owners whether with good credit or not and the pricing will reflect their credit worthiness. The program will not be restricted to the distressed homeowners only as it is not a bailout, so that this new housing finance system will operate under a pure free market mechanism, i.e. people with bad credit records or indecent behaviors may not even qualify.

We have heard that Congressman Gary Miller from California is contemplating on introducing a Bill to require the banks to let homeowners rent for 5 years after foreclosure. It is a great new initiative. If a homeowner is currently paying 5% per annum of his house value for mortgage payments every month after he switches to renting it could be only 2% per annum for monthly rents and therefore he could save 3% per annum to stay in his house. For a house that is worth $800,000, the monthly payment will be reduced from $3,333 to $1,333. It will be a $2,000 saving every month.

If the Bill lets the bank have a 5 year rental contract “after foreclosure” it could definitely stabilize the property market, create social value for both the homeowners and the neighborhoods. However, the financial value of the mortgage would have been totally destroyed and the high transaction cost will make both the homeowners, banks and mortgage loan or MBS investors lose money. In addition, homeowners’ credit records will be severely impaired.

Why not let the homeowners stay in the house, make the new lower monthly rent payments to the banks and save the cost differential between owning and renting for the next 5 years “before foreclosure”? It could accomplish exactly all the same objectives of this proposed Bill and in addition, save the value of the mortgages and avoid many administrative hassles and high transaction cost typically associated with a foreclosure. It will make both the homeowners, banks and mortgage loans or MBS investors happy under an absolutely pure free market principle.

This description above is exactly what the newly created “temporary own-rent switching” or “economic renting” concept as facilitated by the SwapRent contract and its related consumer financial product HELM (Home Equity Locking Mortgage) could do. In the same example above, homeowners could have much more flexibility in partial renting and for different maturity terms in a SwapRent contract, e.g. he could decide to only do a 25%, 50% or 75% temporary own-rent switch and therefore share only 25%, 50% or 75% of future appreciation of the property by receiving only $500, $1,000 or $1,500 monthly assistance from the investors for various maturity terms, … etc.

The business opportunity to broker-dealers to derive more trading commissions or advisory fees is to help their clients make more money. They could simply advise them on how to trade distressed mortgage debts, MBS or other structured products by adding value through offering the new SwapRent loan workout program to homeowners. The following old blog post explains how a low-risk arbitrage trading opportunity could be developed for a mortgage loans or MBS trader through offering SwapRent transactions to homeowners directly.

http://swaprent.com/blog/2009/01/18/01182009-how-to-profit-from-trading-distressed-mbs-or-mortgage-whole-loans-a-revisited-topic/

As a very simple example, after buying the distressed mortgage loans or MBS at deep discounted prices, by offering a $500, $800 or $1000 monthly subsidy through the SwapRent contracts to a distressed homeowner, depending on his/her particular need, in order for the homeowner to have enough monthly subsidy to hang on to his/her home, an investor or current holder of the mortgage debt could get to avoid an expensive foreclosure. The value of the distressed mortgages will recover immediately once the uncertainty of potential defaults/foreclosures is removed by closing the SwapRent deal with the homeowners, at least for the next 2, 3, 5, 7 or 10 years (whatever maturity term of the chosen SwapRent contract). The investor could then immediately sell these worked-out mortgage debts back to other longer term fixed income institutional investors to realize a short term trading profit.

After that, the investor could also resell these SwapRent contracts (the equity piece, so to speak) which retain the financial value of the future appreciation potential to other free market investors through REIDeX to get the money back in order to recycle the capital or to simply put the SwapRent contracts in a longer term home equity appreciation fund mentioned above and wait for future appreciation. The point is that chances are they may have already made enough money from the short term arbitrage trading of the mortgage loans or MBS, whether or not they could further make more money on this equity piece might not have been an important motivating factor for them to initiate the transaction to begin with. The much larger short term trading profit has already been realized on the mortgage trades. That is what matters most. The carrying cost of holding on to the SwapRent contract is low anyway as it was specifically designed as a stream of small monthly cash flow to each homeowners spread out throughout the life of each of the SwapRent contract.

By adding this short term trading profit motives may help eliminate the need to find third party investors to come up with month cash subsidies to help the homeowners in need to hold on to their homes. Under this arrangement, the current risk holders of these troubled assets would be the ones that would come up with the cash monthly subsidies to homeowners so that the mortgages they currently hold would recover in value. The broker-dealer will make money from increased trading commissions or from investment banking advisory fees. Their trading clients will be able to make a lot of money and those investors who already got stuck with the troubled assets would be saved. Most importantly, the distressed homeowners would be rescued from being foreclosed. Their children will get to continue to go to the same schools.

It is indeed an opportunity to do good while doing well for both the broker-dealers and their clients.

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07/27/2009 Introduce to consumers something new through something old that they are already very familiar with

Monday, July 27th, 2009

As illustrated on slide #4 in the latest version of the SwapRent presentation file, there are three ways to bring the monthly subsidies from investors to homeowners in return for a part of the future appreciation, P2P (as described in the current prototype on REIDeX.com web site), B2C (through middlemen such as credit unions, banks, mortgage lenders, etc. using FARM or HELM) and B2B (trading SwapRent contracts between financial institutions). By having the participation of the financial middlemen such as banks, credit unions and mortgage lenders it could help create the critical mass of transaction liquidity necessary to provide the best pricing for both the homeowners and investors. However at the moment in the very politicized American financial markets, the credit unions seem to be the only type of financial institutions left with a proper image and credibility to be able to launch new innovative housing finance services to assist homeowners in the US. The self-serving reputation built up by Wall Street firms and major national banks seems to preclude them from introducing anything new due to the lack of trust from the public.

Among the many recent questions regarding SwapRent due to the renewed interests in using shared appreciation related concepts by the credit unions, there are a few worthwhile to visit again with an updated explanation.

1. The differences of the SwapRent embedded and detachable mortgages vs. conventional SAM (Shared Appreciation Mortgage), SEM (Shared Equity Mortgage)

There are many major deficiencies of the old ways of offering shared appreciation benefits through the conventional SAM (Shared Appreciation Mortgage) or SEM (Shared Equity Mortgage) products. Here are the three main reasons.

•SAM or SEM do not offer any price transparency since there is no either a primary or a secondary marketplace for homeowners and investors to negotiate what subsidy represents what percentage of shared future appreciation.

•There is no flexibility in maturity terms, percentage of appreciation give-up terms or early termination possibilities by the homeowners or investors.

•The provider banks could not regenerate the capital used to purchase the potential appreciation elements embedded in a SAM or SEM through selling these potential appreciation elements to other free market investors through a secondary market.

As a result, this simple economic concept of shared appreciation usually ended up only being offered by local governments to homeowners using taxpayer’s money in the past. The taxpayers’ money usually gets stuck for 20 or 30 years (the terms of the mortgage itself) in the way as they have been practiced so far in many countries.

A good recent example to understand why the conventional SAM or SEM would not work is by looking at what shared appreciation scheme that the Federal government had done in its H4H homeowners bailout program implemented in October 2008. The one recipe formula in its program contains all the problems and short-comings described above. To solve these problems, our financial markets need new innovations. It may not make sense for credit unions or any other financial institutions to spend resources now on the shared appreciation related concepts only to repeat the Federal government’s mistakes if the methodology is not drastically improved.

The key thing to make it successful is to design a new financial contract to extract out the shared appreciation component and detach it from a conventional shared appreciation mortgage product so that market participants can quantify it and give a fair value market price in a freely negotiated and traded secondary market. SwapRent is the new financial contract created specifically for this purpose and REIDeX is the secondary market to facilitate the price discovery and the capital regeneration functions for the benefits of the homeowners and investors. The combined new economic owning and renting concepts is the conceptual foundation of how to use the SwapRent transaction and apply these new housing finance methodologies.

On slide #5 in the SwapRent presentation file, there are examples on the two opposite entry points for homeowners to use either FARM or HELM to switch between economic owning vs. renting for the both the Muslim vs. Western worlds. FARM could of course be offered to Western consumers as well. There are no inherent obstacles other than the ideological issue and the lure of easy credit in our existing financial systems in the Western world. From the government’s perspectives, tightening the credit spigot a bit and introduce non-lending based FARM types of housing finance products to homeowners could stabilize the society without sacrificing any overall homeownership level for its citizens. While HELM seems to be able to offer helps to clean up the current mess through shared appreciation, as a new alternative, FARM seems to be much better suited to build a stronger foundation of a new housing finance system in the long run.

2. The differences between SwapRent and conventional financial derivatives such as calls, puts, forwards and swaps practiced in the institutional markets

The original objectives of the inventions of SwapRent and its embedded suite of financial products were to create a totally new consumer financial concepts and fool-proof uses of financial transactions so that they could continue to enjoy the same economic benefits of conventional financial derivative contracts without their complexity and the danger of potential abuses by either the consumers or the vendors.

The best example in the past of such successful consumer products is the prepayment option built in a fixed rate long term mortgage loan. It is in fact an interest rate derivative contract (a call option on the interest rate level). However, banks have never marketed as a derivative contract and consumers have been taking advantage of it without any potential dangers or problems. These objectives were exactly what SwapRent and its embedded financial products were originally designed to achieve.

3. The differences of economic renting and owning concepts vs. shared appreciation or shared equity concepts

By focusing on the newly created consumer financial concepts of full or partial “Economic Renting” and “Economic Owning” will make the explanations of shared appreciation or shared equity concepts redundant. Nor will there be any need to explain what selling covered call options or buying call and put options are all about. The best way to introduce new economic concepts to consumers is to introduce something new through something old that they are already very familiar with. For that matter, everyone is already very familiar with the difference between owning and renting a property.

Therefore if one is an owner of a real estate property, he will be entitled to the future financial appreciation of the property. At the same time he will have to bear the risk of downside depreciation. If he is a renter instead, he will not have any benefits of future appreciation or the risk of losing money if property value declines. Therefore by becoming an “Economic Renter” a consumer will understand that by being a renter, by definition, he will not have the benefits of any future appreciation.

For example, if a person chose to save money, sold his house and became a conventional renter for the next 5 years. He gets to pay a lower rental payments than the previously much higher mortgage payments every month. Five year later if the house appreciated in value by 20%, he will have no right to go back to the new owner and ask for a part of the financial gains. No matter how dumb he may act., no laws or liberal politicians will be on his side.

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06/25/2009 Shared appreciation mortgage loan modifications by Federal Credit Unions

Friday, June 26th, 2009

In light of the recent news that federal credit unions are now legally authorized to offer shared appreciation mortgage loan modifications to its member homeowners, an exciting new chapter of hope for American homeowners has been turned to.

Although the economic owning or renting concept as facilitated by the SwapRent contract and its embedded mortgage product HELM is the most efficient and effective methodology to utilize shared appreciation by the American homeowners to avoid defaults and prevent foreclosures, our earlier attempts since late 2006 and most of 2007 to assist major commercial banks, mortgage lenders and Wall Street firms have not been a successful one. By the time these sexy banks finally realized the merits and values of the SwapRent methodology it was already too late. Many of them were either on their death beds or had no credibility to launch any new business anymore. Try to imagine if a over-paid mortgage broker from Countrywide knocks on your door now and tries to help you with your mortgage payment problems with a new kind of mortgage innovation? Equally, imagine if a hot shot bond trader from Lehman Brothers tries to peddle some new innovation to hedge the mortgage portfolios among the newly cooked up MBS and CDOs that he recommends too to small pension funds in Norway or some major banks in Iceland? … Understandably none of these once high flyers would make a good partner to help us introduce SwapRent to the world. With that kind of negative image of those banks, we would have simply been viewed guilty of self-serving by association if we work with these disreputable Wall Street firms in the current environment. That would have instantly ruined my dedicated life-time research work on new housing finance for the good cause. So, we turned down a few requests to work together.

Our later tedious hard work of meeting after meeting in early and mid 2008 to help municipalities, city, county and state governments across the nation to offer the SwapRent program as a fully self-funded not-for-profit operation to save their local citizens/homeowners as well as the dire straits of their own government finances did not go far either. It was much too easier for them to simply have a handout to the federal government for more taxpayers’ money as a bailout. A few of them are intelligent enough to see the value of SwapRent but politically they don’t have a backbone to stand up straight to take any initiatives. Asking for federal handouts had worked well for them to survive so far but it seems time is running out for them again at the moment.

As far as all those efforts in late 2008 invested in educating and dealing with the federal administration officials and Congressional staff members, the best responses we got back were solicitations for political donations and invitations to help them get re-elected as though we could be another cash cow for them! Those who say capitalism is at its best in America seem to have a point.

So a new chapter indeed now that the credit unions could finally have the chance to step up to the plate to help American homeowners.

As explained in many previous blog postings that a timely implementation of SwapRent and HELM may help the homeowners hang on to their homes. The local governments could stabilize the local property value through preventing defaults and increasing new investment demands through a new channel for property investors. It could offer portable housing affordability to low income homeowners at the same time. The P2P (Peer to Peer) business model prototype site that we had built for the US market is at http://www.REIDeX.com . The B2C (Business to Consumer) and B2B (Business to Business) business models are also operated by REIDeX, Inc. These institutional businesses are done using traditional means without an on-line web automation process.

The business concepts of SwapRent and REIDeX could be a bit complicated at first glance since they are radically new innovations. However, once people have had a chance to spend some time to understand them they feel it is a quite natural development of our future housing finance system for our free market based capitalism societies. There is a difference between learning about a new economic concept of shared appreciation versus learning a detailed systemic quantitative methodology to effectively make those related simple economic concepts possible in reality in a more efficient way. SwapRent and REIDeX are such detailed executable step-by-step business methodologies beyond simply introducing a new financial concept.

By being a middleman in the SwapRent offering credit unions could develop a new kind of business activities or a new kind of fully self funded not-for-profit operations for the benefits of their members. The business model is again fully explained on slide #11 in the SwapRent presentation slides.

As also explained at the SwapRent.com home page, there are many major deficiencies of the old ways of offering shared appreciation benefits through the conventional SAM (Shared Appreciation Mortgage) or SEM (Shared Equity Mortgage) products. First, SAM or SEM do not offer any price transparency since there is no either a primary or a secondary marketplace for homeowners and investors to negotiate what subsidy represents what percentage of shared future appreciation. Second, there is no flexibility in maturity terms, percentage of appreciation give-up terms or early termination possibilities. Third, the provider banks could not regenerate the capital of used to purchase the potential appreciation elements embedded in a SAM or SEM through selling these potential appreciation elements to other free market investors through a secondary market.

As a result, this simple economic concept of shared appreciation usually ended up only being offered by local governments to homeowners using taxpayer’s money in the past. Furthermore the taxpayers’ money usually got stuck for 20 or 30 years (the terms of the mortgage itself) in the way as they have been practiced so far in many other countries. There are numerous other problems with the conventional SAM or SEM, hence the need of new innovations such as SwapRent and HELM.

A good recent example to understand why the conventional SAM or SEM would not work is by looking at what shared appreciation scheme that the Federal government had done in its H4H homeowners bailout program launched in October 2008. The one recipe formula in its program contains all the problems and short-comings described above. To solve these problems, our financial markets need new innovations. It may not make sense for credit unions to spend resources now on the shared appreciation concept only to repeat the Federal government’s mistakes if the methodology is not improved.

The key thing to make it successful is to design a new financial contract to extract out the shared appreciation component and detach it from a conventional shared appreciation mortgage product so that market participants can quantify it and give a fair value market price in a freely negotiated and traded secondary market. SwapRent is the new financial contract created specifically for this purpose and REIDeX is the secondary market to facilitate the price discovery, risk transference and the capital regeneration functions for the benefits of the homeowners and investors. The combined new economic owning and renting concepts is the conceptual foundation of how to use the SwapRent transaction and apply these new housing finance methodologies.

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