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Monday February 28th, 2011

0228 2011 FARJHO – Opportunity for gaining political credit for politicians and the innovation role for banks, credit unions or other mortgage lenders

So FARJHO is great. What is in it for the banks and the politicians?

Further to my 0227 2011 blog post below on the key features of FARJHO, one of most important new innovative concepts for real estate property investing going forward is to do away with the concept of using the property as the collateral for borrowing when it comes to “home ownership”. This way, foreclosure will no longer be a possibility, ever!

People may choose to continue to use the property as the collateral for all other types of real estate investments but when it comes to owning homes, it should be avoided at all cost for the homeowner’s, joint property investors’ and the entire society’s greater good.

For most commercial real estate investors who often use the same LLC structure to co-own some office buildings, hotels, industrial warehouses or retail shopping complexes, it is usually an intentional goal to use the LLC structure to shield the liability of mortgage loans for each of the LLC’s members so that they could borrow as much as they could to achieve the highest leveraged returns. That is indeed the way the property investors have tried to outsmart the banks so that they could walk away when the property market collapse and let the lenders hold the bags of under water depreciated properties. This has been a main pit fault in our current banking system since it always creates financial crises and the taxpayers would always eventually have to bail them out upon the maneuvering by the bankers and the crony politicians, most often or not, under the ridiculous excuse of being “too big to fail”.

Why can’t the lenders smarten up to lend to each individual LLC members and use their LLC member interests as the collaterals, the same way banks lend to stock market investors by using their common share securities in the listed companies as collaterals?

As mentioned before, in the main design of the basic FARJHO structures the aspiring home owners (AHO) and the joint property investors (JPI) usually use all cash to purchase the homes. How they individually have obtained the cash is not necessarily an issue as long as they are the legitimate owners of the cash, i.e. whether they have borrowed or not to end up with the necessary cash is not an issue on individual basis.

Therefore for the LLC version of the FARJHO structure to be introduced in the US, since we could not do away with the borrowing concept all together due to the borrowing culture deeply embedded in many property investors’ minds in their desire to use leverage as much as possible to achieve higher returns if and when the outcome is good. As a result, the borrowing/lending provision has been created for the US version of FARJHO but recommended to be conducted only at the LLC member level, i.e. only at the shareholder level if the home is to become the one property corporation co-owned by the aspiring home owners and other joint property investors.

It would indeed be a pioneering innovative effort for the proactive banks, credit unions or any other mortgage lenders to consider to start lending to the FARJHO LLC members using their individual member interests in the FARJHO LLC as the collaterals.

As explained before, if and when any of the LLC members ever loses his/her monthly income capability, he/she could either sell their member interests to other free market based investors or let it be foreclosed by the lenders individually. Therefore either a new free market based investor or the lending bank would replace the defaulting co-owner and become the new co-owner with the current home occupier/co-owner (AHO) and all other joint property co-owners (JPIs).

Again, this is exactly the way how the new FARJHO structure could introduce and ensure a new safety piece of mind in home ownership, neighborhood stability and social harmony to the society with no more deserted, un-cared for foreclosed homes scattered around the local communities. We have been speaking with many banks, credit unions and lenders within the past few years but the real innovative bank hero has yet to stand up to make it happen in order to claim the credit.

Congress could certainly get their act together to pass a law to request all home lending to be conducted under this FARJHO concept through a transitional implementation period. Therefore it seems there could be many political credits to be claimed for if any politicians who could champion these new ideas and make the necessary effort to make it happen.

In addition, there could be another great opportunity for any aspiring statesman to champion to waive the annual LLC franchise fee for low income working families so that it would be possible for them to use the LLC structure to corporatize their homes under the FARJHO concept and method.

Using the $800 annual franchise fee required in the state of California as an example, it may not be a major cost factor percentage-wise for $2 or $3 million coastal mansions in Orange County but it would easily become a heavy burden for the partial homeowners in a $100,000 or $200,000 homes in the Inland Empire area in Southern California.

Let’s hope some smart budding politicians could indeed take advantage of all these new opportunities to change the home lending practices by the banks and campaign for the waiving of the annual LLC franchise fees for local residents in many states during the next election. We will vote for them!

Sunday February 27th, 2011

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sunday February 20th, 2011

The advantages of Cash Flow Sharing vs. Equity Sharing in stimulating our national economy

There have recently been growing number of people who suddenly realized that the simple “equity sharing”, “shared appreciation” or “shared ownership” concept of owning a real estate property could be a viable solution to our country’s mortgage lending or housing finance mess.

Few have had the “Eureka moments” yet about the fact that these simple economic concepts could be modified to create a new economic stimulus program to revive the economic prosperity of our country.

The learning process has been kind of long and the progress has been slow. We need much more people who have the media power or the access to op-eds at leading newspapers to endorse these simple ideas.

The disconnection of moving these shared appreciation related concepts from rescuing the housing finance crisis to further using them as economic policy management tools is due to the lack of the awareness of new innovations already available of some newer concepts and more importantly, newer improved “methodologies” to make implementing these “Shared Appreciation” goals feasible and practical.

That is where the newly invented “Cash Flow Sharing” concept and method come in and that was also exactly one of the key rationales behind the creation of the SwapRent(SM) contract back in 2006.

For more details about the SwapRent(SM) transactions, please visit the SwapRent.com home page again to have a more systematic way to the understanding of these new concepts and methods.

I would like to emphasize only one point here. As compared to the “Shared Equity” method where cash recipients could simply squander way to the new found up-front cash, “Shared Cash Flows” would allow Adam Smith’s “Invisible Hand”, not the capital providers, to have a better control on how the SwapRent(SM) cash flow recipients would utilize these new cash flows to invest more in local small businesses and to create more local jobs under free market based principles.

This is exactly what our country needs right now and it should always be the goal of any economic stimulus programs conducted by the governments.

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

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

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

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

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

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

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

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

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

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

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