Category Archives: Bernanke Arbitrage

0522 2013 FARJHO is the answer to Rep Loretta Sanchez’s question to Fed Chairman Bernanke today.

In Bernanke’s testimony today, Representative Loretta Sanchez asked about how middle class families who had lost their homes in the downturn have been unable to regain home ownership in the current housing price run-up made happen by the new hedge fund land lords.

Immediately following that, Senator Mike Lee asked Bernanke about the potential danger in repeating the previous credit bubble by the current loose monetary policy and easy credit again pop up the housing sector.

I am glad to see that the politicians will finally start realizing the problems with the Fed’s monetary policy and the Administration’s housing policies. I think they both may want to read my recent previous blog posts below to find the answers to their questions and assume a leader role to take the necessary actions with FARJHO to correct these serious middle class home ownership problems in a timely manner. It would be nice if only they could start watching the short introductory video about FARJHO to begin with.

Anybody who knows them, please feel free to forward this post to them. Thanks.

0503 2012 Application Example of An Arbitrage Investment Opportunity Using the New FARJHO Home Ownership Structure

This example appears in the 2nd page of InvestorsAlly’s FARJHO marketing flyer.

Application Example of An Arbitrage Investment Opportunity Using the New FARJHO Home Ownership Structure

Do you want to put your idle home equity to work so that you could earn more appreciation potential? Would you be interested in helping other less affluent residents to partially co-own homes in California?

You could use your excess home equity to co-own homes with a tenant/partial home co-owner in a new home ownership structure called FARJHO – Flexible And Reversible Joint Home Ownership. Here is a short analysis for a home of an appraised value of $2,000,000. The amount of cash out re-finance is assumed to be $1,000,000 for illustration simplicity purpose as an example.

Before                                After

Current Home Fair Market Value

$ 2,000,000               $ 2,000,000

Re-Investments in Other FARJHO Transactions

__________              $ 1,000,000

Equivalent Home Equity for Potential Appreciation

$ 2,000,000              $ 3,000,000

What about the carry, i.e. netted monthly cash flows between expense and income under the FARJHO transaction?

*         A financial arbitrage currently exists as the mortgage rates are still being artificially kept very low.

*         Between the current long term fixed rate borrowing cost (e.g. 3% – 4% for a 15-year or 30-year fixed rate mortgage) and the current market rental yield (e.g. 7% – 12%) there exists a net positive carry of 1% – 5% annually after deducting all taxes, fees and insurance cost in favor of the arbitrageurs under a typical FARJHO transaction.

*         The cost of the monthly mortgage payments will remain the same for the next 15 or 30 years but the income from monthly rental receipts will adjust every two or three years and would most likely to go even higher in the current trend.

*         The arbitrageurs who take out the cash-out re-finance now could enjoy not only the potential long-term price appreciation from much expanded home equity, they will also receive a check as additional current income every month.

*         The current low fixed mortgage rates may not last forever. A change will be coming and it would be wise to lock it in now.

The free enterprise capitalism based new home ownership structure FARJHOSM could let pure profit-driven real estate investors help other aspiring home owners partially co-own homes through the equity sharing concept without the imprudent use of any debt. FARJHOSM was created back in 2009 as a fair and equitable business method to address the free market needs of both joint property investors and aspiring home owners. Through FARJHOSM, foreclosure will no longer be a possibility going forward. It will help restore our national economic prosperity, foster the steady growth of our country’s housing industry as well as promote the on-going neighborhood stability and social harmony in local communities throughout our country!

0402 2012 The distinguishing features of FARJHO as a new business method to implement the equity sharing concept are three-fold

The following text appears on the 1st page of InvestorsAlly’s FARJHO marketing flyer.

Do you have trouble in obtaining a conventional mortgage to buy a home or any trouble in selling your existing home when potential buyers could not qualify for a mortgage to buy your home?

InvestorsAlly could help you buy a home using the new equity sharing method and/or help you sell your house much quicker because InvestorsAlly could help other potential buyers obtain both conventional mortgages at low mortgage rates when they have good credit, and if not, help them try the new alternative equity sharing method of FARJHO.

The distinguishing features of FARJHO as a new business method to implement the equity sharing concept are three-fold:

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

Second, as a brand new concept, FARJHO only allows member level debt financing, to eliminate the foreclosure possibility which exists with conventional property level debt financing as commonly used by a Shared Equity Mortgage (SEM), a Shared Appreciation Mortgage (SAM), a Shared Ownership Mortgage (SOM) or any other existing equity sharing schemes to date. In all those older business methods, the home occupiers could still get foreclosed whenever they lose their monthly income capability under those old property level financing arrangements.

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

0201 2012 Let’s give the Fed a third mandate – Avoiding income/wealth distribution inequality

A kid came home with his report card. It shows 4 F’s and 1 D. So his father in his stern face asked him “What happened?” The kid with tearful eyes fearfully murmured, “I know where I did wrong Dad, I spent too much of my time on only one subject …”

If you blame Ben Bernanke about what a mess the Fed has made to this country in terms of income/wealth distribution inequality within the last decade, he would most likely give you an answer of defense in his typical lip’s movements beneath the mustache only that it is not his job to give it a damn. It is the Congress’ fault that they only gave him and the Fed two mandates of fighting inflation and stimulating the economy/job creation only.

So forget about downgrading and removing one of the mandates and let the Fed focus on maintaining price stability only. We should ask them to upgrade and start focusing on three mandates, fighting future inflation, lowering unemployment and avoiding income/wealth distribution inequality.

Even when that happens, I am afraid that little school boy Ben would most likely come home with a report card with 2 F’s on fighting future inflation and avoiding income/wealth distribution inequality and a D in lowering unemployment/job creation so far. He most likely would have spent too much of his time on only one subject.

Let’s hope by adding this new dimension of avoiding income/wealth distribution inequality would make the Fed’s taxpayers sponsored jobs a bit more deserving than simply doing nothing but the two dimensional game of thumbs up or thumbs down on interest rates during their Federal Open Market Committee (FOMC) meetings.

P.S. Perhaps Ben deserves an A for the extra-curricular activity and self-created mandate of helping bail out the cronies?

Reposting – 03/30/2011 Mr. Obama, Tear down this Wall … Street! – A Matrix movie fan’s interpretation of the Bailout of Wall Street.

In support of some selective part of the Occupy Wall Street protesters (at this stage they are not all the same within the diverse group of 99%’ers), I would like to republish an old post that was originally published almost 7 months ago back on 0330 2011. The messages seem to have only become more and more relevant.

As Ron Paul was once considered nutty or even crazy with the idea to abolish the Fed, as was my blog post below at the time but now it seems the ideas are on their way to become a part of the mainstream thinking.

I have always wondered how children and grandchildren of Bernanke and his cohorts at the Federal Reserve Board would think of them in the future. After they have totally destroyed the previously vibrant middle class in America, opened the door of the opportunity to let the left wing opportunists to mislead the working poor and the mob on the streets to throw capitalism out of America and let America decay and fall into oblivion in the world stage, do you really think that their children and grand children would still view them as heroes as how the current 1%’ers on Wall Street do today?


So Barack, or Barry rather, please allow me to be casual with you. I am no Ronald and you are definitely much more handsome then Mikhail Gorbachev without a piece of salami hanging on the forehead. I’d just like to have a frank talk with you about our country’s economic policies and Matrix the movie. Perhaps you wouldn’t mind if I call you Mr. Anderson? Neo?

First I’d like to apologize for calling you a puppet subprime President in my earlier blog dated 5/23/2009. I understand what it could be like to be the only Hussein among the establishments and I feel for you.

The frustration came from the expectation we had of you, the One would not reinsert the Prime Program back into Matrix at the Source one more time again back when we voted for you to be the President. But the opposite seems to be exactly what you have been doing. You started to look more like Agent Smith now. I hope you are a Matrix movie fan as I am and you know what I meant. If so, you may find the following analogies of our country’s Wall Street culture, your economic policies and the movie story lines interesting.

You see, Wall Street is the Matrix that has been controlling us the working class (the Humans). Out here on Main Street (Zion City) in the local communities our home ownership structure has been dominated and dictated by the exclusively debt-based mortgage industry (Zero One) created by Wall Street, Fannie, Freddie and their big bank buddies (the Machines). They have in the past been placing in their local branches those docile captured humans while keeping their minds in the Matrix in order to help the Machines disseminate the credit abuse culture and ensure their control of the Earth.

The Federal Reserve, the Treasury Department and their buddies (the Architects) has been engineering the bailouts of the crony riches, printing and pumping more money into the Matrix system to maintain its vitality and crony establishments the same way the Architects have been trying to bring you, the One, together with the Source in order to reboot the Matrix and destroy the Zion yet one more cycle, the same way all your five predecessors did.

From the Berlin Wall coming down to the recent Arab unrests in the Middle East (the Prophecy), we all have witnessed the unprecedented triumph of the people power (the Oracle) in our modern history. Despite the techie’s claims that technological developments of newer tools such as CNN in the early days to the Twitter and Facebook have made the information dissemination faster and more wide-spread, it is really the underlying force of this democratic movements driven by the people’s desire for Free Will seems to be on its way to unbalance the Matrix. You Neo are the One who has been led to the Source by the Keymaker, should not be swayed by the Architects’ assertion to reboot the Matrix again. Let me tell you why.

In our modern history, the Fed (member of the Architects) has been manipulating interest rates and the supply of money in our economy by using repos/reverse repos to implement their monetary policies and the unique Quantitative Easing programs through Wall Street dealers (the Martix) in a pattern of creations and destructions of Main Street (Zion) over and over again while rebooting Wall Street (the Matrix) with revitalized new life to maintain its status quo of the continuously enriched establishments. In particular, Bernanke’s QE and QE2 seemed to have made “Greenspan Put” a child play. Although the Matrix system does have many obvious fundamental serous problems and weaknesses but it somehow kept rebooting itself at the expense of our remaining Human Race who reside at Zion.

Whipsawing the economy is really what their monetary policy doctrine or the much worshipped Monetarism is all about. Inflating bubbles, deflating bubbles, jerking our domestic Main Street economy in the past seems to be not enough, now with the free flow of dollar-based capital, they have the entire global markets to jerk around with in the world and keep playing those same bubble blowing, popping, blowing, popping games all over again, under the disguise or the much worshipped theory called “Monetarism”. In these processes, the Wall Street insiders (the Matrix) get to reap obscene profits and revitalize itself at the expense of exploiting the Main Street (the Humans) over and over again.

Simply take a look at the recent history since Bernanke and Geithner took office. Ben has been a Member of the Board of Governors of the Federal Reserve System since September 2002 to June 2005 during the bubble building years. He became the Chairman of the Council of Economic Advisors from June 2005 to January 2006 and then became Chairman of the Federal Reserve on February 1st, 2006. Timothy on the other hand was holding the key influential role to Wall Street as the President of the Federal Reserve Bank of New York from November 17, 2003 to January 26, 2009 until he became the Secretary of Treasury Department on January 26th of 2009. Together they had been a crucial part of the front men of the Architects of the Matrix to reboot the Matrix when Matrix should have been totally destroyed should there had been no crony forces at work.

Knowing there was a housing market bubble, instead of finding viable soft landing policy alternatives, from June 30th of 2004 until June 29th of 2006 they raised the Fed Fund Rates from 1% all the way to 5.25% in order to throwing darts randomly to “pop the bubble” under the doctrines of “Monetarism”. Facing a crisis in 2007, they decided that they could build more bubbles than Greenspan ever did. From September 8th of 2007 through December 16th of 2008 until today they brought down the Fed Fund Rate from 5.25% to .025% again, under the doctrines of “Monetarism” and presumed prudent “Central Banking Policies”. Furthermore with the newly invented Quantitative Easing Programs, they have started to flood the whole world with dollar liquidity to build even more asset bubbles across the board and induce further global social instability. Until today nobody could really find out what the Architects’ true motives are.

Do they really know what they are doing or have they simply been making it up along the way? If they are so smart and love asset bubble building so much then Greenspan had ever been able to, why did they even bother to “pop Greenspan’s housing bubble” back in 2004 to 2006 to begin with? Wouldn’t it be just as convenient to leave the Fed Fund Rates unchanged and find other housing equity sharing based soft landing policies to cool down the economy instead? That would have led to a Paradise Matrix rather than the Nightmare Matrix they are turning us into now.

It is really funny to observe how the Architects have been busy congratulating and promoting themselves for a presumed job well done in preserving the Wall Street (the Matrix) to avoid a depression and dodging the fact that they were actually the very one who had created the Global Crisis of 2008 to begin with by blindly popping the Greenspan’s housing bubble through their hawkish policies between 2004 to 2006.

What they have really preserved was merely the previous Wall Street crony establishments. A depression it was not. The public certainly needs to know better that there would not have been a depression and that we would all have been better off now had the Architects not done the rescuing of the privileged few at our taxpayers’ expenses in 2008. Cronyism simply means there is an artificial human intervention of the natural selection process for the benefits of the privileged few at the expense of others. We all could live just fine without Goldman Sachs, really.

Given the current economic policies and an unknown and dangerous future for both the US and the world, have any academics been paying attention to analyze how the Architects’ economic policies to date have grossly polarized the American economy between the haves and have-nots while creating the biggest destruction of the middle class in America that have shaken the working class’s faith in Capitalism? The Matrix seems to be getting more and more unbalanced from its own exploitation.

Anyway Neo, for now you seem to have been cloned to just another Agent Smith. Until the next time we talk again, I await your next act.

05/09/2011 More on the "Bernanke Arbitrage" trade – fellow rich Americans helping fellow Americans own homes as a brilliant investment opportunity for themselves

In Southern California, all around us there are many wealthy people who own multi-million dollar homes along the coastal area from Malibu, Pacific Palisades, Beverly Hills, Manhattan Beach, Newport Beach, Laguna Beach down to La Jolla in San Diego. Many of them do not even have a mortgage.

On average many decent homes in these exclusive coastal area are worth above two million dollars. Wouldn’t it be a good idea for some of them to have a cash out refinance to put their idle home equity to work. Say they could simply borrow only one million dollars (50%) from their two-million-dollar home and use that money to invest in a partial interest through a member interest in a FARJHO/LLC deal to help some other less fortunate fellow Californians to own homes? One million dollar cash could probably help finance three or four FARJHO deals in the Inland Empire area for example, where average decent homes could sell around $300,000.

This is by no means just a charity work for these rich property owners. They could potentially do very well and become much richer by doing good this way. At today’s posting, the level of a 15-year fixed rate mortgage is about 3.83%. In a FARJHO deal the current market rental rate comes up to be between 5% to 7% annually. The positive carry could range between 1% to 3% after cost.

Generically speaking, that means if a rich home owner with a $2 million home borrows a fixed rate mortgage of $1 million (50% LTV) and invests the cash as a JPI (joint property investor) to help 3 to 4 other AHOs (Aspiring Home Owners) to buy homes through the FARJHO structure, he/she could earn a minimum spread of between 1 to 3% on the one million dollars every year for the next 15 years while turning his $2 million home equity in his current property into a total equivalent of $3 million home equity for the next 15 years.

When home prices start to go up anytime within the next 15 years (say 5 or 7 years later), he/she could simply unwind the trade by selling the homes he/she invested in when agreed by the AHOs, selling only the FARJHO member interests to the AHOs or to any other third party investors in order to take profit. He/she can then use the proceeds (much higher than $1 million) to pay off the original $1 million loan (either amortized or a balloon). He/she could have the choice of using either an interest only loan or a fully amortized loan for this 15 year fixed rate mortgage, with some benefits trade-off of course.

There are also justifiable tax oriented incentives such as the home mortgage interest deduction for unlocking this primary residence home equity through a moderate leveraging for these rich people. As long as they stick to the 30- or 15-year fixed rate mortgages so that there would not be unnecessary interest rate risk in the future, it could be made a prudent investment for them. Here below are a few other advantages as compared to his/her other investment alternatives with the cash generated through refinancing.

1. The annual dividend yield from the rental income in a FARJHO deal could also go higher periodically (say at every 3 year intervals) within the next 15 or 30 years while the interest rate cost has already been fixed for the next 15 or 30 years. That may make the total returns outcome even better than projected.

2. The key to success of this trade is the current positive carry (rent income could be obtained higher than the mortgage interest cost currently). Very few other relatively safe financial assets could generate such a high yield in dollar terms at the moment.

3. Using the money to invest in speculative gold, silver or other commodities would generate no yield at all and their high prices could suddenly crash and have a free fall. In contrast, it is unlikely there would be a further “crash” in the US residential real estate market going forward. It may at most drift a bit lower before it would eventually rebound, given a no inflation scenario within the next few years. As long as there is a positive carry, the chance that the trade would lose money would be minimal. With high inflation, this Bernanke Arbitrage trade could really win big.

4. Comparing with using that money to invest in stocks. Few stocks would have such high secured dividends for such a long period with such a high appreciation potential at the same time. Stock investments could also potentially end up being zero due to fraud or mismanagement such as Enron, WorldCom, etc. It is unlikely that investors would lose their shirts entirely on real estate.

5. With a current average 6% annual minimum dividend yield from rental income and the unlimited upside growth potential in home equity through investing in a FARJHO transaction, why would any free market investors put their money into a residential mortgage which only generates 3.86% annually at the moment with no upside appreciation potential at all for the next 15 years? The answer really lies in the name. This trading strategy is hence called a “Bernanke Arbitrage” trade.

Don’t stay a victim of Fed’s QEs. Big banks on Wall Street should not be the only ones who have benefited and continue to benefit from these unwise economic policies for our country. If we can not stop them. Why not join the loot? Let’s make Quantitative Easings work for the American working class people and home owners on Main Street!

05/06/2011 The Bernanke Arbitrage – Increasing home equity exposure through FARJHO (SM) near the bottom of the residential market

An easy financial arbitrage could be established by current home owners who have paid off their original mortgages on their own properties, assuming they have some income sources to secure a new mortgage on their current properties. Alternatively, any homeowners who have existing excess home equity to do cash out refinance could also take advantage of these timely arbitrage investment opportunities.

With the current long term fixed rate mortgage level around 5%, the home owners could use that money to invest in another home as a partial owner, i.e. a JPI (Joint Property Investor) to help another AHO (Aspiring Home Owner) to own home. From the JPI’s perspective, he/she could earn around 6% almost guaranteed minimum annual income through the rental payments made by the AHO in a FARJHO (SM) deal. As a result, the JPI could sit on a small annual positive cash flows (6% – 5% = 1%) while increasing the long term capital appreciation potential from his/her stake in the FARJHO (SM) LLC member interests.

Wouldn’t this be a great “Bernanke Arbitrage” as an inflation hedge for average Joe home owners on Main Street while Bernanke and his crony Wall Street cohorts keep enjoying the money for nothing through the Fed’s near zero interest rate policy and repeated QE’s?

With the dollar depreciation and high inflation almost a certainty as the Federal Reserve continues their loose monetary policy, increased home equity exposure would very likely outperform most other financial assets in an inflationary scenario. Borrowing money from GSEs, guaranteed by FHA at 5% or even lower for the long term may not be as good a steal as many Wall Streets cronies get but it is indeed better than nothing.

Isn’t it time that the Main Street jump on the bandwagon to get even with Wall Street? If the elite minorities on Wall Street could get money for nothing and make themselves more and more obscene profits, why can’t average Joe try to do the same on Main Street, rather than sitting there waiting for bread crumbs falling off from the Wall Street riches?

Don’t get mad, get even. Main Street needs not jettison Capitalism and embrace Socialism to solve their problems. They need to stand up and learn more on how to make Capitalism working for them. The revenge of the nerds is coming!

%d bloggers like this: