Tag Archives: Affordable housing

0114 2012 Will a new US President make any difference in helping create a housing recovery and revitalize our economy?

Here below is an excerpt of my upcoming FARJHO article to be published in March.

Governments who set up policies using those ill-advised primitive methods (e.g. the original HOPE for Homeowners proposal in 2008) have only destroyed people’s confidence in the equity sharing concept to solve the problems and let the mortgage foreclosure problems deteriorate further day by day. The Hope for Homeowners (H4H) Program is a loan program that was a part of the Housing and Economic Recovery Act of 2008. The guidelines for the product were released by FHA on October 1st, 2008.

In the original HOPE for Homeowners (H4H) offering, the Federal Reserve together with the HUD Team proposed a non-free market based arbitrary equity sharing scheme for debt principal reduction as (Ref 3)

100% if the property is sold after 1 year

80% if the property is sold after 2 year

70% if the property is sold after 3 year

60% if the property is sold after 4 year

50% if the property is sold after 5 year

There were few takers. Any further consideration by other national policy makers and economists of using equity sharing related concepts to solve our country’s severe housing-led economic problems on a large scale also quickly died with it too for now. The incompetence of these policy makers is indeed very unfortunate and lamentable.

The worrisome part is that even when the top level politicians change posts later on these same technical middle level managers may still be the ones that will continue to squat on the same positions at the Fed and at the HUD since these subject matters may be deemed too technical for the top level politicians or top level policy makers to mess around with.

Will a new President make any difference?

1203 2011 The new innovative economic stimulus application using equity sharing methods, not debt and not tax credit, to prop up the housing market

Further to my 1126 2011 blog post and many other earlier posts on this issue, taking expedient economic stimulus measures to prop up the national economy as a concept is a bi-partisan issue and supported by all kinds of economists, even the most libertarian ones. The question is really on what methods to use to implement the economic stimulus activities so that the money provided could indeed stay in the local communities on Main Street long enough to create local jobs instead of immediately flowing to investment opportunities in foreign emerging markets for the Wall Street riches to further enrich themselves.

So economically

1. the need for economic stimulus activities to revive our national economy is agreed and accepted by all, although not agreeable on what methods.
2. the linkage between a robust local property market, i.e. increased home equity hence wealth for home owners, and local economic prosperity on Main Street is well recognized by academics and politicians.
3. using more debt to blow up more property, stock and bond market bubbles again will only be another temporary fix similar to kicking cans down the road to build up bigger problems down the road.
4. lowering interest rates further will not benefit the home owners and small businessmen on Main Street since the credit distribution channel has been impaired during most depressed time periods of the economy.
5. pumping more money and liquidity into the system will only benefit the rich further since only the rich has access to even more credit.
6. the rich top 1% in our society, their financial advisors, hedge funds, private equity firms and even US based multi-national corporations will use the excess dollar liquidity to invest in high GDP growth countries such as China, India, Brazil, Russia, Australia, … etc. to further enrich themselves.
7. the dollar liquidity created by current monetary policies conducted by Ben Bernanke and his cohorts at the Fed to date has created more jobs for foreigners than for us Americans on Main Street.

and politically

1. the bailout of big banks and Wall Street firms is both unpopular and unwise to the 99% of our population.
2. more Quantitative Easing (the various QEs) has proven to be toxic to everyone but the Wall Street professionals.
3. raising taxes could be detrimental or even fatal to the remaining careers in Washington DC for most politicians.
4. ramping up more budget deficits hoping to kick the can down the road to the next administration has become more obvious and unpopular to the public.
5. creating jobs for foreigners through pumping out more dollars while providing low cost of fund to and making the hedge fund and private equity investment gurus richer at our country’s expense has been understood by even the most economically illiterate citizens has discredited the Fed’s reputation day by day.
6. destroying American jobs and killing small businesses on Main Street through a lack of competence in the current economic policy makers has created extreme inequality and has been turning our country more and more towards the left and will further the causes of many variations of the Occupy Wall Street (OWS) movements.

Perhaps it is time for the economic policy makers and their technical staff members to learn something new and take a serious look at how our country could use the property equity sharing concepts and the various free market based business methods developed to date as a new set of economic stimulus tools?

It seems to be easier said than done. For one thing, why the economic policy alternatives using the new equity sharing concepts and made possible by FARJHO and SwapRent have not made an impact so far? Without pin-pointing where the problems are these repeated suggestions could just be further waste of efforts.

1. the equity sharing related subject matter may be deemed too technical by policy makers and their technical staff since it is new.
2. suspicion of any new innovations created by other people.
3. resistance to learn something new in order to change.
4. those people who have first spent the time to learn these new concepts and methods are still at a stage of thinking about equity sharing’s micro level application for foreclosure avoidance for distressed home owners only.
5. few people so far until this date have realized the importance of connecting these new property equity sharing concepts and methods with the macro level application to perform massive economic stimulus on either a national or a local level that would, on a free market basis without government’s monetary assistance, cover distressed home owners, big and small property speculators as well as any other free market based investors alike.

As a case in point, here is an example. Back in 2008, the respectable Founder and Chairman of the Peterson Institute Pete Peterson had forwarded the SwapRent solutions to the Republican presidential candidates and had been very supportive of the causes represented by FARJHO and SwapRent. However, David Walker, his staff and appointed CEO for the institute who was supposed to an expert on economic issues, advised him instead that

“Pete,
This proposal does not seem to differentiate between individuals who are deserving of help and those who aren’t. I don’t think that second homes, investment properties or individuals who entered into irresponsible primary residence mortgages should receive taxpayer assistance.
Dave

David’s failure to understand the basic principles of how free market capitalism could operate without having to rely on tax payer’s money is both surprising and lamentable.

That kind of attitude and lack of economic common sense is exactly what is stopping our government from seriously adopting property equity sharing concepts and methods as new innovative economic stimulus measures to create local jobs, revitalize local economies on Main Street in order to help save our country’s economic future.

The Obama Administration had similarly been informed with these proposals since before the election in 2008. Other than those primitive shared appreciation methods with unsuccessful results in the October 2008 Hope for Homeowners plan, there have not been other efforts in this regard. The H4H fiasco will be discussed in an upcoming article to be published this month and will be reviewed in the next blog post towards the end of the month.

Let’s hope the presidential candidates for 2012 would take a more serious consideration of using these new innovative economic policy applications of the equity sharing concepts and methods to solve our country’s economic problems in order to acquire a timely political advantage for themselves in the up-coming election.

1126 2011 We need to blow up a home equity bubble using equity sharing methods, not debt, like how Silicon Valley blew up tech company stock market bubbles

Ben Bernanke and the Federal Reserve team please step aside, Silicon Valley please step up. We need to create some equity bubbles, not debt bubbles, to reflate our national economy in order to save our economic future. In particular, the national policy makers need to learn and use the equity bubble building techniques that the venture capitalists have been so skillfully creating wealth for themselves, their investors and the entrepreneurs in the past to apply to and to prop up the local property markets on Main Streets across the country.

Most economists, policy makers and concerned citizens probably have learned by now that it is the damaged credit distribution channels, not interest rate levels, that is blocking their desperate attempts to reflate the economic bubbles using debts alone. We all know that credit is a very funny thing. It is always plenty only to those people who do not need it. Therefore rich people have access to plenty and poor people can not get any. Excess money supply made possible by low interest rates have only been making the rich even richer and hence created more and more social tension on wealth distribution equality. Federal Reserve with its money pumping policies without the consideration of its negative effects of creating wealth inequality has hence been the henchman that has killed the middle class in America.

The only occasions when poor people could get credit is during the occasional irrational time of bubble building periods and when the credit process is being abused. When rationality returns, the supply of credit to the poor will come to a sudden halt as is what is happening now. On a further thought, this may not be a bad thing actually. Trying to re-energize the drug addicts with even more Cocaine in a desperate attempt is like kicking the can down the road to let other people solve the eventual real problems and could at most behave like a superficial temporary fix that may lead to much more expanded troubles down the road. A re-hab together with a new diet to create a new life would probably be a more prudent problem solving method.

Similarly, to re-energize our national economy, we will need to focus on alternative ways of financing, other than debt, to reflate our economy for both the short term and long term problem fixing purposes. As once students of finance, we all know that high risk ventures are usually financed by equities, not debts. For example, the entire industry of venture capital in Silicon Valley is focused on equity financing, shared equity financing in corporate ownership, to be precise. That same technique is exactly what we need now to reflate the home equity markets and hence our national economy.

FARJHO and SwapRent related new business methods that we provide only represent a few possible more superior business methods to implement this equity sharing or appreciation sharing economic concepts to attract more equity based fresh capital to resuscitate our national economy on a free market basis. In order to make it work, the national policy makers will need to learn and understand that the goal of rebuilding our national economy could be done through these equity sharing economic concepts. It does not matter whether they choose to use the new FARJHO and/or SwapRent methods or not. They need to open the doors and encourage free market investors to participate in all kinds of equity sharing business methods that utilize the equity sharing concepts so that there would be enough free market capital to flow back into local communities across America to re-create property market led economic booms on Main Street.

Using debt to blow bubbles should not be the only trick up their sleeves. It did not and will not work anyway since the credit distribution channels will not function properly in bad economic times no matter how low they make the interest rate levels to be. That is simply the nature of how credit works. On the other hand, as long as these new bubbles are not blown up through Other People’s Money (OPM), i.e. debt again, it would most likely be Ok for now to get us out of the recession and unemployment for most of the 99% population.

As I mentioned in earlier blogs many times before, asset bubbles are usually blown up by OPM using debt. It is a dangerous bubble that could be popped because it was blown up by hot air. Equity induced asset growth could act more like a hardened molten lava. Once it is cooled and hardened, it does not have to pop or shrink back again. This is due to the simple fact that if the asset was purchased by equity without using debt, when price level declines, there would not be any involuntary selling as would be the case if the asset was purchased with debt.

So the way to make this policy strategy works, the government will need to recognize the need to extend all kinds of smart and stupid property equity sharing methods on a massive scale and on a pure free market basis that include property speculators, not just to use these equity sharing concepts and methods on a limited basis to distressed home owners as a foreclosure avoidance tool only. That concept is similar to the same textbook difference in managing macro-economics vs micro-economics. We will need to use these new property equity sharing concepts and methods as a new way of doing massive macro-economic stimulus for our country.

When free market based investors are aware that these proactive innovative economic stimulus policies have been understood and finally adopted by the relevant policy makers, being implemented on a massive scale and most importantly that they could also participate in, free market based fresh capital will start pouring in automatically to make America rich again. These investors would come in voluntarily simply based on their views that the government is willing to ramp up the prices and hence a timely profit making opportunity for themselves.

The strategy above is a repeat of what has been said many times before in a different way on how to use the equity sharing concept and methods to get our country out of the current economic dilemma ( http://wp.me/p1Cgsz-gI ). When the economy stabilizes, how the government could continue to use SwapRent and FARJHO related new business methods as a third new way of economic policy management tools to stimulate or to slow down a country’s economic growth through the real estate property values of a country was explained more in details in an article that I have published before back in 2009 ( http://www.box.net/shared/v24qtqip4hlgff5l1646 ).

1003 2011 Let FARJHO and SwapRent bring housing finance from the sleight-of-hands on Wall Street to the common people on Main Street – Food for thoughts for the Occupy Wall Street protesters

The Occupy Wall Street protesters’ movement seems to be gaining steam and momentum but what do they want to accomplish?

How about telling Wall Street to stop meddling with our housing finances? Furthermore, the angry protesters that occupied Wall Street seemed to be only able to focus of what have been stolen but they are definitely out of touch on what is about to be stolen again by the very same thieves while they are risking their lives physically protesting to on Wall Street.

First, the best economic solutions and/or new economic systems could be totally ruined if left in the wrong hands again. We need more people’s active participation and the support of PeoplesAlly Foundation to further our causes of FARJHO and SwapRent for the benefits of the people on Main Street. Let’s work together to keep Wall Street big banks’ dirty fingers off these new democratic solutions.

Second, we will need to prevent another financial heist like those happened in 2008 from happening again. In Russia and other third world countries the oligarchs have to make some special efforts to steal the national assets behind closed doors. It would actually be a lot of hard work for them and perhaps a few investigative journalists would have to be poisoned or murdered along the way. Here in America, they do it right in the open by spinning the media with wrong information and manipulating the public sentiment with political influence. They did it times and again right in front of our eyes and there was not a thing that we, the folks on Main Street could do about it. The case in point is FHFA’s current plan to sell the REOs (foreclosed homes) that they own to privileged private sector firms.

The distrust of the federal government’s housing plans is not unwarranted. Remember when the financial crisis first emerged in 2008 and the federal government came up with their first solution that left many of us flabbergasted? While people are losing homes and jobs left and right everywhere, the first thing they did was to come up with a plan to use tax payer’s money to give more than one thousand dollars to the mortgage servicing firms owned by their crony friends for each of the loan mods that they worked on? (Goldman Sachs used to own a major mortgage servicing firm Litton Loan Servicing and only sold it in June this year after many robo-signing scandals.)

You may also have seen how “housing experts” or securities analysts from the investment banks such as Morgan Stanley etc. keep spinning the story on TV and in the press media that the federal government has no experience in running the renting business as the sole reason why GSEs/FHA should sell their REOs to the private sector firms in bulk at discounted prices. It would be another big feast, if not steal, for their crony friends in Washington DC and on Wall Street again while being empowered by the almost zero cost of fund to build up their war chest, thanks to Bernanke and the Federal Reserve Board. It is like hitting another Super Jackpot again!

Let’s hope the cronies would not get it their way to buy in bulk at deep discount our national assets owned by the GSEs/FHA again. If they get it their way, they would become the new serfdom landlords to millions of working class people on Main Street. It will turn America into an oligarch state without a middle class. Can you imagine United States of America is about to become a nation of renters to a few handful of oligarchs!

The availability of the information of FARJHO and the services to the GSEs/FHA may have a chance to stop these pending thefts if more information is made public and understood properly by people on Main Street on what kind of financial heist is about to happen all over again.

Don’t wait to protest after it has happened again. Protest to stop it from happening at all!

0910 2011 Our response to FHFA’s RFI – FARJHO and SwapRent from PeoplesAlly Foundation and InvestorsAlly, Inc. – A letter to the Fed, the Administration, GSEs, HUD, SEC, CFTC, other Agencies and the State Governments

Here below is a recent update letter to many of my academic friends who possess well established expertise in economics, economic history, finance, derivatives, laws, mathematics, housing, housing finance, urban planning, real estate, business studies, public policy and political science in various leading universities around the US and in selected foreign countries. I thank them for the various feedbacks and support through the years.

Transparency in our federal government’s policy making process is always a good thing for our country and for our democratic society. As one public figure recently said, the best way to keep a secret is to do the right thing.

============
Dear AcademicAlly,

How are you?

Here below is the latest development regarding our efforts to help solve our nation’s housing-led economic crisis. As you know I have been in touch with many of the government folks regarding FARJHO and SwapRent on an academic basis within the past few years since 2007. Please feel free to let me know if you would like review some of their earlier feedbacks. Yours and your colleagues’ academic input and critiques on our proposal would be highly appreciated.

We have provided our FARJHO and SwapRent solutions to the FHFA and submitted our response to their August 10th RFI project (see below) from both PeoplesAlly Foundation ( http://www.PeoplesAlly.org ) and InvestorsAlly, Inc. ( http://www.InvestorsAlly.com ). The non-profit will provide the educational services and the counseling of home owners which we have spent tremendous time to build and to create a political voice within the past year. InvestorsAlly will focus on providing the technology platform for the FARJHO matching services at http://www.farjho.com as what it was always set up to do since the inception on a pure free market basis.

For a thorough understanding of the new FARJHO methodology to own homes one home at a time, here is the link to my draft paper on FARJHO ( http://www.box.net/shared/yfhkjbqre4idf1kgrtc4 ) which is to be published by the housing finance journal HFI in their upcoming September or December issue as a sequel to my earlier article on SwapRent ( http://www.box.net/shared/v24qtqip4hlgff5l1646 ) published in the December 2009 issue.

Please note again the link to a copy of our response is at http://www.box.net/shared/hpfqqajd1aremco716lr . There could be many area that you and your colleagues could help improve this project. Your active participation to further fine tune our proposed methods, the deployment channels and delivery procedures would be very welcome. It is all for saving our country’s economic future. Let’s work as a team.

Let’s hope that these unwise policy decisions made or to be made by our federal government, intentionally or not, will not turn our country into an oligarch state without a middle class soon. Your active participation may help change the course of history. Please feel free to let me know if you have any questions. Thanks.

===============
Date: Sat, 10 Sep 2011 11:54:07 -0700
To: Email addresses suppressed
From: Ralph Liu <ralph.liu@investorsally.com>
Subject: Our response to FHFA’s RFI – FARJHO and SwapRent from PeoplesAlly Foundation and InvestorsAlly, Inc.

Dear Federal Reserve Board Chairman, Regional Presidents, Administration, Treasury, FDIC, HUD, GSEs, SEC, CFTC, Congressional Staff and Other Relevant Agency Officials,

cc. State Governments, State Housing Authorities

How are you? I would like to give you guys an update on the latest developments of our FARJHO and SwapRent efforts.

On August 10th FHFA, the regulator of GSEs issued a RFI asking for ideas from the public on how to deal with their REOs portfolios. Here is the link to their original request. http://www.fhfa.gov/webfiles/22366/RFIFinal081011.pdfrding

We have submitted our public response to FHFA from PeoplesAlly Foundation and InvestorsAlly, Inc. in early September. Here is the link to a copy of our response for your kind review and comments. http://www.box.net/shared/hpfqqajd1aremco716lr

The advantages of our FARJHO based proposal are:

1. It eliminates the need to let privileged private parties have access to and engage in quick short term buy-low-sell-high flipping activities at preferential bulk sale discount prices to profit from the potential privatization of our national assets owned by the GSEs and FHA.

2. It helps avoid the federal government, the elite private equity firms in DC or hedge funds on Wall Street from becoming new long term serfdom landlords to low income working families on Main Street by allowing renters to become partial co-owners of the home properties through FARJHO LLCs.

3. Potential wealth created from a future recovery of the US housing market will be able to be channelled through FARJHO back to small town investors, mom’n’pop’s self-directed IRAs, state, county and local pension funds, church groups, non-profit endowments etc. on Main Street to fix the local government’s pension liabilities and budget deficits by investing on a more level playing field with other elite institutional investors on Wall Street who already have exclusive access to the use of leveraged low cost of funds as a result of the Fed’s loose monetary policies to profit from the potential price appreciation.

4. Through the new Borrow-Pool-Buy (BPB) member level borrowing concept that replaces the old Pool-Borrow-Buy (PBB) property level financing practice in other conventional equity sharing schemes, future foreclosure possibilities could be totally eliminated once and for all in this new FARJHO home ownership structure.

In addition, I would like to take the opportunity to invite your attention again to the applications of SwapRent as a new economic policy management tool that goes beyond its initial objective of creating housing affordability. A successful implementation could provide the governments with a new way of economic stimulus method similar to how governments have been managing the countries’ economic activities by adjusting the interest rate levels at the moment.

Since 30’s and 40’s Keynesian economy and 50’s and 60’s Monetarism could not function well in a technologically very different modern world in 2011 where hot money flows freely and instantaneously across borders, a new economic policy management tool has to be created so that the stimulus money could have “the stickiness effect” and stay in local communities to have the desired economic stimulus objectives of creating local jobs for the domestic economy. That is exactly what a new SwapRent market could deliver.

For an introductory description of how this could work please kindly review Chapter 6 of the SwapRent article published at the December 2009 issue of the Journal of Housing Finance International published by International Union of Housing Finance (IUHF) at http://www.box.net/shared/v24qtqip4hlgff5l1646 . The following two blog posts also explain how this could be done in local communities through championing by local politicians on a free market basis without relying on any handouts from the federal government.

https://peoplesally.wordpress.com/2011/02/19/02202011-it-is-not-keynesian-it-is-not-monetarist-perhaps-we-could-call-it-swaprentism-any-better-suggestions/

https://peoplesally.wordpress.com/2011/08/02/0802-2011-implementation-strategies-of-farjho-and-swaprent-good-economic-stimulus-public-policy-or-cornering-the-real-estate-market-by-investors-for-profits/

All information contained in our proposal to FHFA are non-confidential in nature and therefore are free for public distribution. Please feel free to share with us your thoughts and comments. Thanks.

Ralph Y. Liu
Managing Director
PeoplesAlly Foundation
23 Corporate Plaza Drive, Suite 133
Newport Beach, CA 92660
Tel: 1-888-456-8881 x 888
Fax: 1-888-315-3831
Direct: 1-949-371-9139
peoplesally@gmail.com
http://www.PeoplesAlly.org
http://www.twitter.com/SwapRent
http://SwapRent.com
http://www.linkedin.com/in/ralphyliu

 

0819 2010 How and when to apply the new FARJHO (Flexible And Reversible Joint Home Ownership) structure?

The following information is on how to apply the new economic concept of the separation of shelter value (use value) and the investment value (economic value) of a conventional ownership of a real estate property. For more details please visit our commercial site at http://www.InvestorsAlly.com or our non-profit operations at http://www.PeoplesAlly.org to assist low income working families with increased housing affordability and enhanced neighborhood stability.

Example 1 – From aspiring home owner’s perspective:

A home seeking person who currently rents identifies a property in a geographical area of his/her choice. He/She has the 10% of the property in cash from his/her own savings and would like to seek to jointly own the property with other investors as the ideal home owning structure.

The reasons could be because that he/she may not have enough monthly income to qualify for a conventional mortgage, prefers to use the discretionary monthly income for other household expenses, does not think the property value may increase in the near term, for his/her particular religious belief that rejects the lending/borrowing concepts or simply any other personal preferences.

He/She commits to pay a pre-agreed rent to the FARJHO LLC that holds the title of the property for a specific period of time. The remaining 90% property ownership could be shared among up to nine other individual, corporate institutional or even governmental entities.

Example 2 – From joint property investor’s perspective:

A group of investors have identified and bought a particular single family house at bargain price through a syndicated LLC structure either through a short sale process or from a bank’s REO portfolio.

The syndicator of the FARJHO LLC tries to find a long term renter of this single family house in order to generate stable long term rental income. Many renters do not commit to the long term and do not usually care about the houses that they rent.

The syndicator/property manager makes an offer to a qualified renter who has the ability to pay for a small percentage of the property value and invites him/her to join the LLC as a minority stake holder/member himself/herself. Once the renter becomes the minority homeowner, he/she may intend to stay for the long term and would treasure the property and take good care of it as thought it were his/her own. In fact it is indeed his/her own, albeit partially. Although he/she does not have the economic income capability normally required to own the property entirely he/she gets to enjoy the high quality home in the neighborhood of his/her choice.

Through buy/sell agreements between LLC members, the homeowners could increase his/her equity ownership through buying existing member’s interests. Alternatively, he/she could use SwapRent contracts to do so when they become available at REIDeX in the near future. In the worst case scenario, he/she could also become a LLC member in another property in the same neighborhood whenever he/she has the increased economic ability to do so and would like to have more investment exposures.

Comparing with conventional commercial property investments, FARJHO offers property investors less worries about vacancy and expenses. The investor’s SGI (Scheduled Gross Income) equals to his/her GOI (Gross Operating Income) and also to his/her NOI (Net Operating Income) since both annual vacancy loss and expenses are most likely zero in a FARJHO structure.

Example 3 – Current application opportunities in the US:

A homeowner currently has a deeply underwater house. He/She contemplates a strategic default on his/her own house but does not like the idea of becoming an apartment renter. A buy-and-bail strategy sounds more appealing to him/her. He/She could use an all equity based FARJHO (SM) structure to become the minority owner/renter of an alternative property in his/her neighborhood before he/she begins discussions with his/her current mortgage lending bank to give up his/her existing homes in either a short sale or a flat out walkaway foreclosure.

The strategic defaulters usually could not secure another mortgage to buy another comparable home before or after he/she walks away from his/her existing home. To qualify for a new mortgage on a second home, he/she has to either have 30% net equity in his/her existing home or a very large fully documented monthly income to qualify for the mortgage payments of two homes. This is often not the case with most upside down homeowners.

An all equity based FARJHO co-ownership structure makes it convenient for a smoother transition to a long term comparable or even nicer and often more spacious home through a partial equity ownership without having to lose the homeowner status by becoming a conventional apartment or house renter. It may turn a somewhat embarrassing, face-losing event into a move-up in prestige as a partial owner of a much bigger and nicer house!

Example 4 – How to use borrowing (through Borrow-Pool-Buy, BPB method) to achieve leveraged higher investment returns under FARJHO:

In a FARJHO transaction, each individual member co-owner can decide whether to borrow for their portion or not. Cash rich investors do not have to borrow. No group decision or action to borrow together is necessary. If some of the co-owner members want to borrow individually for themselves, then the borrowing leverage (LTV) is up to each of the members individually and their individual lenders using the percentage ownership in the legal entity or the corporation as the collateral.

So let’s say a home which is worth $100,000 is being bought by a FARJHO LLC. Three members, A (20%), B (40%) and C (40%) pooled the capital to form the LLC to begin with so that the LLC had the money to buy the home. LLC did not and will not borrow any money or use the property as collateral to borrow any more money. Since neither the FARJHO LLC nor the home property itself owes any money, therefore there is no possibility of a foreclosure of the home property, ever!

Member A was supposed to be the home occupier (AHO), so he pays the LLC a market based rent every month for 3 years say in a 3-year lease as an example. It could be any lease maturity and will be determined by all the members in the LLC.

In terms of borrowing, Member A did not borrow to come up with the $20,000 since he would not want to pay a loan payment in addition to the rent payment very month. Member B does not like to be burdened by the debt service so he did not borrow to come up with the $40,000 cash either. Member C likes to punt and strongly believes in using leverage to achieve high returns. On the other hand, he does not have enough money for the required $40,000. Say he only has $10,000 in savings so he borrowed $30,000 from a lender using his 40% share or member interests in the LLC as the collateral for the lender. The leverage that Member C uses is 75% LTV of his partial member interest in the LLC and his down payment equals to 25% of the value of that partial member interest.

So in the example above, cash was used to purchase the property entirely and no borrowing using the property as the collateral was involved. Borrowing activity, if any, will be conducted only at the member level at each member’s discretion only. That is exactly the spirit of the new FARJHO concept and method to own homes, irrespective which country the homes or the home owners are located.

Example 5 – Section 8’ed FARJHO – AHOs who are Section 8 rent payment assistance recipients

A current Section 8 rental assistance payment recipient inherited $50,000 from his parents. She does not want to put it in the stock market or any mutual funds which she is not familiar with and she thinks those Wall Street stuff are too risky. She wanted to use it to buy a home but the amount is not big enough to buy in an all-cash deal. She can not use it as a down payment to borrow any mortgage because no lenders would be interested in talking to her due to her low income status. The lenders do not believe that she could generate enough monthly income to service a mortgage payment.

She heard about the new Section 8’ed FARJHO program from the local housing authority from her city. She found out that she could team up with a few free market based Joint Property Investors (JPIs) to form a FARJHO LLC to buy a home together and get the new home qualified as a Section 8 property. She could then simply apply the rent payment assistance from the existing Section 8 program as the rent payments to the FARJHO LLC. In this way she would not only just be a renter but also become a partial home owner under this FARJHO arrangement.

Since she is not restricted to renting from a multi-family apartment complex in the run-down districts only, she decides to buy a REO single family house from the Fannie Mae Homepath program in a decent neighborhood as her dream home. The cost of the house is $300,000 in a city in Southern California. In this FARJHO structure she would own 1/6 of the equity ownership of the FARJHO LLC.

The remaining balance of the house price was paid by five other free market based investors. Investor A and B who put in $30,000 each are individuals using their retirement money in their respective IRA accounts. Investor C who put in $100,000 is a local public employee pension fund. Investor D is a foreign individual and he put in $40,000. The remaining $50,000 was put in from an individual property speculator who prefers to use leverage to enhance the potential investment returns. He put down $10,000 cash and borrowed $40,000 so that he could deduct the interest expense for this investment.

The Section 8 recipient gets $1500 monthly rental assistance from HUD every month. She contributes an additional $200 so her total monthly rent paid to the FARJHO LLC is $1,700. This equates to an annual rental yield of 6.8% to all members of the investor group in the FARJHO LLC which the Section 8 recipient/renter herself is also a member of. That is her annual investment income for each year she stays in as a 1/6 interest member. In addition, she will also enjoy the financial value of 1/6 of the potential appreciation of the home property.

The free market based investors are interested in teaming up with the Section 8 recipient over other regular higher income AHOs because they might think, rightfully or wrongfully, the credit risk is much lower since the bulk of the income rent payments would come from the assistance of Uncle Sam!

08/18/2011 FARJHO – securitization of home equity vs. securitization of mortgages, SwapRent – real estate derivatives vs. mortgage derivatives

This is a short blog post to clarify the difference between the securitization of home equities (home equity securitization) and the securitization of mortgages (mortgage securitization) as well as the most commonly misunderstood term of real estate derivatives by the some people vs. what they really meant, mortgage derivatives.

The key to understand the difference is to know that the underlying assets are quite different. One is equity in nature, the other is simply a debt. While there are often blatant abuses of debt by both the borrowers and the lenders through loose credit policy and practice, it is not possible to abuse the equity in the same way.

As I mentioned before in many earlier blog posts, securitizations and financial derivatives are extensions to either equity or debt like how glass-and-steel buildings could be built upon a foundation. If the foundation is a solid rock then the chances of the building to collapse is not much a concern as it would be if the building was built on slippery quick sands. So the problem is not the building but rather the foundation where the buildings are located.

Similarly the problems are not as much with either the securitization concept or the financial derivatives rather as with whether they were built on plain equity, conservative low leveraged debt or the risky over-stretched debt conducted on a loose credit practice.

FARJHO LLC member interests are ownership in the equity form just like corporate shares listed in the stock exchanges are in the form of equity. The purpose of FARJHO is to “corporatize home equities” or to “securitize home equities” for the various economic and social benefits discussed in details in earlier posts. It has nothing to do with any debt, loans, mortgages or financial derivatives. It is definitely not in any shape or form, a securitization of mortgages again.

It is as simple as a common stock of companies but the ownership represents a fractional interest in a homeowner’s home property instead, that is made possible by this new FARJHO concept.

SwapRent, on the other hand, is a new consumer version of equity based real estate derivatives or alternatively called, property derivatives. It is not a mortgage or a mortgage derivative. It is the various forms of mortgage derivatives, credit derivatives, CDOs, Credit Default Swaps etc. that have played a major role in the financial crises within the past few years, not these new “real estate derivatives”.

Therefore, although there seems to be plenty of hostility by certain people about financial innovations, mortgage securitizations, mortgage derivatives, the responsible, intelligent and educated consumers should have no problem in understanding that FARJHO and SwapRent are not related to any of those that have caused controversies in the past. Furthermore they should be regarded more as social innovations in housing and new home ownership concepts than purely another financial innovations for facilitating investors to make money more easily. Even though they do that as well, and they do it much more efficiently.

08/13/2011 Weekly round-up of FARJHO discussions from various Linkedin Groups

On Section 8’ed FARJHO to let Section 8 recipients have a partial ownership of the property that they rent:
Ralph this sounds like a great idea, and many belong to some kind of neighborhood beautification program as well.

Reply:
Yes, let free market capitalism to create the motivation for the renters to beautify the properties and neighborhoods on their own, at their own cost, by simply turning them into partial owners of the properties. Let them share a little bit potential financial value appreciation helps but injecting pride and self prestige of being one of the owners would really be the main driving force.

===========
On PeoplesAlly’s role to educate the working class families to let them join their fair share of the benefits of capitalism:
Interesting conflict. The point of the PeoplesAlly is to support the working class. I am not sure the description above or on the blog comes close to being understandable by anyone without a serious financial background.

Reply:
Right on target, a mission no one else has tried or been willing to do before. That is why Wall Street has been holding intellectual hostage of Main Street, getting the better part of capitalism. I hope you can see why we have created our foundation slogan as – The Intellectual Ally behind the People and the Capitalist for the Working Class!

PeoplesAlly’s main tools are education of and counseling to both aspiring home owners and joint property investors for putting together fair and equitable FARJHO structures based on free market principles to own homes and hence increasing housing affordability and social stability.

So far we have had long line of applications from aspiring home owners and not enough joint property investors. It appears that we need to beef up our efforts on the more intelligent investors, rather than the working class home owners at this stage. Thanks.

============
On technical details and examples of the new Borrow-Pool-Buy (BPB) of FARJHO vs. the old Pool-Borrow-Buy (PBB) practiced by other property equity sharing schemes:

Reply 2:
That is still different from the proposed new FARJHO method to co-own homes. In a FARJHO transaction, each individual member co-owner can decide whether to borrow for their portion or not. Cash rich investors do not have to borrow. No group decisions or actions to borrow together. If some of the co-owner members want to borrow individually for themselves, then the borrowing leverage (LTV) is up to each of the members individually and their individual lenders.

So let’s say a home which is worth $100,000 is being bought by a FARJHO LLC. Three members, A (20%), B (40%) and C (40%) pooled the capital to form the LLC to begin with so that the LLC had the money to buy the home. LLC did not and will not borrow any money or use the property as collateral to borrow any money. Since neither the FARJHO LLC nor the home property owes money, therefore there is no possibility of a foreclosure of the home property, ever.

Member A was supposed to be the home occupier (AHO), so he pays the LLC a market based rent every month for 3 years say in a 3-year lease as an example.

In terms of borrowing, Member A did not borrow to come up with the $20,000 since he would not want to pay a loan payment in addition to the rent payment very month. Member B does not like to be burdened by the debt service so he did not borrow to come up with the $40,000 cash either. Member C likes to punt and strongly believes in using leverage to achieve high returns. On the other hand, he does not have enough money for the required $40,000. Say he only has $10,000 in savings so he borrowed $30,000 from a lender using his 40% share or member interests in the LLC as the collateral for the lender. The leverage that Member C uses is 75% LTV of his member interest in the LLC and his down payment is 25%.

So in the example above, cash was used to purchase the property and no borrowing using the property as the collateral. Borrowing activity, if any, will be conducted only at the member level at each member’s discretion only. That is exactly the spirit of the newly created FARJHO concept and method to own homes, irrespective which country the homes or the home owners are located.

Reply 1:
Oh no. What you described is still the old conventional way. The newly created concept is for people to pool money and use a legal entity to buy one property only as a home using cash. One of the co-investors will rent it from the legal entity. After that there is no more borrowing using the property as collateral. Therefore, no banks or any lender will ever get to foreclose this property.

The borrowing, if any, will only be done by each individual member of the legal entity before they come to the table to form the legal entity to buy the property using the pooled cash. The liability is for each individual only. They can each use their fractional interests in the legal entity as the collateral. Nobody use the entire legal entity or the property per se as the collateral.

All co-investors and lenders, if any, are done based on a pure free market basis. No society, self-help and any other charity groups or concepts will be involved in this unique new free market solution to home ownership.

In the US we have decided to use the convenient LLC structure as the legal entity since real estate investors are already familiar and comfortable with it.

0707 2011 FARJHO combined with Section 8 rent assistance – Section 8’ed FARJHO!

Recently I attended an excellent seminar put together by the Orange County Housing Authority explaining how Section 8 rent payment assistance program works in Orange County. We have been on the lookout for developing more FARJHO and SwapRent based housing affordability programs for PeoplesAlly Foundation so that the new economic benefits could extend to low income working families. It seems that there potentially could be a great match.

One of the very convenient ways for Joint Property Investors (JPIs) to make lower risk investment through FARJHO LLC structures is to pair up with the Section 8 recipients in each state as the AHOs (Aspiring Home Owners). Since these potential partial home owners are most likely low income working families therefore these services are handled and provided through PeoplesAlly Foundation instead of InvestorsAlly, Inc.

The goal of both PeoplesAlly Foundation (PA) and InvestorsAlly, Inc. (IA) is to provide free market based solutions to housing affordability, joblessness and unemployment of our capitalist society so that capitalism could stay intact, irrespective what may happen next to the middle class American people in the unfolding economic crises. None of the solutions provided through either PA or IA would be dependent on tax payer’s money. Free market based solutions are absolutely a must to save our country’s economic future.

The reason why it may provide synergy when linking up with the Section 8 rental assistance program is that FARJHO could make the assistance money for the working poor already committed by the Congress to work much more efficiently. Here is how.

Section 8 rental assistance payment recipients could already choose where they want to live. It has become a tenant oriented assistance program since 1998 rather than building specific as in the past or as in many other affordable housing projects which are often plagued by many problems. So what if some of these recipients have worked hard and earned some savings or inherited some small sum of money? Let’s say it is $50,000. It is not large enough to buy a home here in Southern California and they can not use it as a down payment to borrow a mortgage to buy a home with a 100% ownership since they have very low income to service the debt.

Why not let them own a piece of the property that they rent through the FARJHO structure? It would be a win-win for the Section 8 rent assistance recipients and the landlords. By having a part of the ownership, they would treasure and love the homes that they rent from the Section 8 approved building landlords. They would get to have a percentage of future appreciation value of the property that they own and they would take care of the properties as though it is their own. Most importantly, it would develop a self prestige that they may have become a proud home owner (although partial) and be a more useful and stable member of the local neighborhoods that they reside in. That could be one of the best features of capitalism at work made possible by the new FARJHO structures. Landlords would for sure no longer have as many problems with the tenants as they once did!

Furthermore, since the Section 8 recipients could choose where they want to live, they no longer have to reside in multi-family housing complexes. It is a perfect chance for some of them to choose a dream house to buy through FARJHO from the pools of HUD REOs or even the Fannie Mae Homepath REOs so that they could help our governments clear those massive unsold REO inventories.

Isn’t this a perfect way to help the working poor in America realize their American dreams without using any more of the tax payer’s money or using any form of those dangerous mortgages and/or securitizations?

We look forward to starting to work with some of the housing authorities in many cities, counties and states in the near future to make Section 8’ed FARJHO a reality soon.

 

0704 2011 Confusion on Various Equity Sharing Schemes – Why FARJHO and SwapRent are more social innovations than simply financial innovations.

As I once commented before, if a person is new to the French language or the Greek language, he/she probably would not be able to tell the difference between a baby gibberish vs. a poetic recital as both are “new and foreign” to him/her. It is all Greek to him/her so to speak. That seems to be the current situation with many people when they started to learn about the property equity sharing concepts and methods for the first time. Since both the concepts and the methods are all new to them, many people find it hard to tell a good method from the not-so-good or not-so-smart methods.

Shared equity “concepts” as applied to real estate property is not new. As mentioned before, the Brits have been applying them for over three decades but since the “methods” such as “shared equity mortgage” or SEM and “shared appreciation mortgage” or SAM had not been developed so well, they remain a government led socialism oriented facility so far to assist the poor in their country. Few, if any, free market based investors or participants have been interested in participating. Some British banks got black and blue bruises all over their face when they tried those primitive methods in the 80’s. There have also been some copycats of those exactly the same ideas and methods but re-bottled and promoted in the US and Australia with little success within the past few years.

What makes FARJHO stand out? Well, here is a short recap as a patriotic 4th of July message.

Three unique features make FARJHO different from all the other “equity-sharing methods” or various other “shared equity schemes” ever proposed or practiced so far.

First, the FARJHO/LLC owns one home at a time as “a single family solution”. So the goal of FARJHO is to ensure the sanctity of individual home ownership for individual citizens one home at a time under pure capitalism principles, not a defunct or hippy-ish multi-family commune, land trust, kibbutz or socialist compound concept. We do not have to turn our country into a socialism or communism society to help the poor!

Second, unlike SEM, SAM or all other shared equity schemes proposed by other academics or practiced by other private companies so far, FARJHO does not allow, or does not encourage at least (remember it is a free market democracy and no dictator allowed), any borrowing at the property level to use the entire home property as collateral. All other equity sharing methods are schemes developed to make Wall Street loan sharks even happier so that home owners and investors who gang up together can go crazy leveraging and punt again. Do some simple research through Google searches and you will quickly know what I meant. Those shared equity properties that borrow again at property level may still get foreclosed. They may make the elite minorities on Wall Street happy again but there are few, if any, social benefits in those schemes to mom and pop families on Main Street.

With FARJHO, going forward in the future, borrowing will no longer be the only way for people to own homes. There is no reason why the home property purchase could not be done using all pooled-together cash. The term “foreclosure” may even become obsolete when people started to apply borrowing only under the FARJHO proposed concepts, i.e. borrowing at the member level instead of at the property level. AHO (Aspiring Home Owners) and JPIs (Joint Property Investors) could decide to use prudent leveraging individually before they come to the table to form a FARJHO LLC to own the home. Once the FARJHO LLC is formed there is no more borrowing allowed at the property level so that banks or anybody else in the world would never be able to seize the property from the tenant/partial home owner in a FARJHO structure.

Therefore if and when any of the leverage-loving FARJHO/LLC members ever loses his or her own debt servicing capability in the future, he/she could drop off quietly individually without jeopardizing the stability and occupancy rights of the home property for AHO or the investment security any other JPI investment members who own the rest of the interests in the property. This defaulting member could simply sell the percentage member interests in the property that he/she owns to any other people in a free market or turn them over to the lenders if he/she had financed the purchase of these member interests in the beginning.

Thirdly, it provides an enhanced stability for the home occupier through a voluntary feature offered by the Aspiring Home Owners (AHOs) to the other Joint Property Investors (JPIs) to use the AHO’s equity stake in the FARJHO LLC as a buffer for JPIs to deduct the missed monthly rental payments by the AHO so that the AHO would not be evicted so easily until the buffer runs out. It therefore offers much more home occupier stability than any other rental arrangements.

In a bigger picture for the society, when lesser credit-worthy aspiring home owners have resorted to these new socially beneficial equity financing methods, what is left for the banks to lend to, using conventional mortgages, will be much better credit quality home buyers/borrowers. More free market based consumer choices will always be a win-win situation for everyone under the uninhibited capitalism. So there is no reason for those good banks or good capitalists on Wall Street to fear or feel threatened by these socially oriented new inventions.

More summaries on the social benefits of SwapRent will be described again later. Many of them could of course already be found at the SwapRent.com web site.

So today’s message on the 4th of July, 2011 is really – you can still be a capitalist to provide social benefits to the working class people in America. For doing that we may need the American people to acknowledge and accept these new social innovations under capitalism operating principles rather than keeping asking for bail-outs or hand-outs. In addition, we will need the ultimate transparency in their implementations so that the new innovations would not be stolen, hj-jacked and abused to benefit the privileged few when landed in the wrong hands by the dark forces of the elite minorities in our society again.

%d bloggers like this: