Tag Archives: social innovation

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.

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