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PeoplesAlly Foundation                                                       23 Corporate Plaza Drive, Suite 133          ...
PeoplesAlly Foundation                                                          23 Corporate Plaza Drive, Suite 133       ...
PeoplesAlly Foundation                                                         23 Corporate Plaza Drive, Suite 133        ...
PeoplesAlly Foundation                                                        23 Corporate Plaza Drive, Suite 133         ...
PeoplesAlly Foundation                                                        23 Corporate Plaza Drive, Suite 133         ...
PeoplesAlly Foundation                                                      23 Corporate Plaza Drive, Suite 133           ...
PeoplesAlly Foundation                                                      23 Corporate Plaza Drive, Suite 133           ...
PeoplesAlly Foundation                                                       23 Corporate Plaza Drive, Suite 133          ...
PeoplesAlly Foundation                                                       23 Corporate Plaza Drive, Suite 133          ...
PeoplesAlly Foundation                                                       23 Corporate Plaza Drive, Suite 133          ...
PeoplesAlly Foundation                                                       23 Corporate Plaza Drive, Suite 133          ...
PeoplesAlly Foundation                                                       23 Corporate Plaza Drive, Suite 133          ...
PeoplesAlly Foundation                                                        23 Corporate Plaza Drive, Suite 133         ...
PeoplesAlly Foundation                                                      23 Corporate Plaza Drive, Suite 133           ...
PeoplesAlly Foundation                                                      23 Corporate Plaza Drive, Suite 133           ...
PeoplesAlly Foundation                                                      23 Corporate Plaza Drive, Suite 133           ...
PeoplesAlly Foundation                                                        23 Corporate Plaza Drive, Suite 133         ...
PeoplesAlly Foundation                                                       23 Corporate Plaza Drive, Suite 133          ...
PeoplesAlly Foundation                                                       23 Corporate Plaza Drive, Suite 133          ...
PeoplesAlly Foundation                                                      23 Corporate Plaza Drive, Suite 133           ...
PeoplesAlly Foundation                                                      23 Corporate Plaza Drive, Suite 133           ...
PeoplesAlly Foundation                                                       23 Corporate Plaza Drive, Suite 133          ...
PeoplesAlly Foundation                                                       23 Corporate Plaza Drive, Suite 133          ...
PeoplesAlly Foundation                                                      23 Corporate Plaza Drive, Suite 133           ...
PeoplesAlly Foundation                                                      23 Corporate Plaza Drive, Suite 133           ...
PeoplesAlly Foundation                                                      23 Corporate Plaza Drive, Suite 133           ...
PeoplesAlly Foundation                      23 Corporate Plaza Drive, Suite 133                               Newport Beac...
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Draft Paper on FARJHO by Ralph Liu 1210 2011

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FARJHO, the history and its many applications

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Transcript of "Draft Paper on FARJHO by Ralph Liu 1210 2011"

  1. 1. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.org FARJHOSM – A new home ownership structure and innovation in housing finance that could eliminate home foreclosures all together SMSince my last article on SwapRent , HELM (Home Equity Locking Mortgage) and FARM(Flexible And Reversible Mortgage) published in the December 2009 issue of the HousingFinance International, there have been many further developments both in terms of academicresearch to solidify them as a new alternative housing finance system and the commercializationof some these new inventions in the real world. Notably, the spin-off of a new home ownership SMstructure called FARJHO (Flexible And Reversible Joint Home Ownership) from the originalFARM (Flexible And Reversible Mortgage) concept has generated most interest from the homeowners in the US. SMHere below is a chart that illustrates the historical development process of SwapRent , SMFARJHO and their associated concepts and products within the past decade until today.In addition, the development of a new concept of a real estate based national foreign exchangevaluation and pegging system called TARELV (Total Aggregate Real Estate and Land Value) -1-
  2. 2. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgCurrencies has gathered some momentum in the academic world since recent events in theglobal financial markets have made the Fiat Currency related Chartalism concepts closer to theirtesting point and the awareness of the need of alternatives for their replacements have grown in avery fast pace within the past few years.Furthermore, there has also been more traction among academics in terms of the new application SMof SwapRent transactions as a new alternative economic policy management tool.These two latter subjects will be discussed in another following-up article. In this article I will focus SMon introducing the new home ownership structure of FARJHO and our implementation efforts SMon a US version of FARJHO to date in the American housing market on both a commercialbasis at http://www.farjho.com managed by InvestorsAlly, Inc. as well as the educational effortson a not-for-profit basis to help the low income working families with increased genuine housingaffordability at PeoplesAlly Foundation (http://www.peoplesally.org). (More detailed text for creating Chart 1) Historical Time Line of the Development of SwapRentSM, FARJHOSM and TARELV• 2001 - 2004 Launched the first real estate index derivatives exchange in Los Angeles, theREIFO (Real Estate Index Futures and Options) Exchange, base on city based property indices.• 2004 - 2006 Introduced the first RMB (CNY) Interest Rate Swap in the Chinese inter-bankmarket in Beijing and created the first long term fixed rate mortgage for home owners in China aswell as the corporate fixed rate loans to corporate borrowers.• 2006 Researched the historical methods and applications of the property equity sharing SMconcept in various consumer markets and created property derivatives based SwapRent , itsembedded mortgage products, HELM, PELM, FVCM, embedded structured deposits, REILD,PILN, new indexing method SPIM and trading marketplace REIDeX. Filed patents in majorcountries. SM• 2007 Worked with banks on these new SwapRent applications in the UK, Australia, HongKong, Singapore as well as Wall Street firms and banks in the US. Campaigned to theCongressional staff, Federal government agencies, HUD, GSEs, Treasury Department and the SMFederal Reserve on considering using SwapRent as a new alternative economic policymanagement tool. SM• 2008 Explored municipal applications of SwapRent with State, County and City governmentsas well as local housing authorities and housing finance agencies across the US. Set up REIDeX, SMInc. in Los Angeles as the online marketplace for trading city index-based SwapRent contracts. SM SM• 2009 Explored Islamic finance applications of SwapRent and the SwapRent embeddedFARM (Flexible And Reversible Mortgage) with central banks and other major financial institutions -2-
  3. 3. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgin the Gulf Region of the Middle East. Worked with Islamic finance scholars on making SMSwapRent and FARM Sharia compliant. SM SM• 2010 Farmed out the FARJHO structure away from SwapRent embedded FARM and setup InvestorsAlly, Inc. in Newport Beach as a separate corporate entity to focus on introducing SMFARJHO only for easier mass market commercialization. Launched the Internet portalhttp://www.farjho.com as a dedicated consumer Internet based peer-to-peer online matchingservice between aspiring home owners and prospective joint property investors. Introduced thenew TARELV (Total Aggregate Real Estate and Land Value) currency concept as a new exchangerate pegging system alternative to the current Chartalism based Fiat currencies.• 2011 Launched the non-profit PeoplesAlly Foundation in Newport Beach to assist low incomeworking families in the US with increased housing affordability without relying on tax payers SM SMmonetary subsidy through the educational work on how to use FARJHO and SwapRent on apure free market basis to flexibly and reversibly accomplish the portable housing affordabilitythrough separating the investment value away from the sheltering purpose of owning a home realestate property.1. FARJHOSM and the “corporatization” of American homes –yes, but only one home at a time and no “corporate debtfinancing” necessary SMFARJHO (Flexible And Reversible Joint Home Ownership) is a new home ownership structureand business method based on the conventional equity sharing concepts that many housing SMprofessionals are already very familiar with. However, FARJHO comes with many newadditional innovative concepts. SMFARJHO was originally developed in 2009 as an off-shoot of the over 10-year research efforts SMon SwapRent related property derivatives research that started back in 2001 as well as anearlier real estate derivatives trading exchange venture (REIFO Exchange) launched in 2002 (Ref1). The goal was to make it simple so that there could be easier and wider immediate consumeracceptance. It was specifically designed to be not related to any form of financial derivatives. It isnot even a mortgage, just a new plain equity based joint home ownership structure without thereliance of the use of any debt in its most generic base version. Therefore regulatory compliancehas become very simple. The very obvious immediate economic and social benefits areenhanced housing affordability, neighborhood stability and social harmony. As a result, these newhome ownership structure and alternatives housing finance system are better viewed as both aform of social innovations for the masses rather than simply a form of financial innovations alonefor investors to potentially make more profits.Readers may recall from the original article published in the December 2009 issue of HFI (Ref 2) SMthat SwapRent is a temporary own-rent switching mechanism that could provide the propertyowners with an opportunity to exchange a portion of the future price appreciation potential on -3-
  4. 4. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgtheir properties for receiving a series current cash flow payment commitment for a period of timefrom a free market based investor on an open exchange or a peer-to-peer Internet portal such as SMREIDeX.com. While the cash flow sharing based SwapRent may be a bit ahead of its time SMsince its creation in 2006 due to its relative complexity, the new equity sharing based FARJHOtransaction has indeed found over-whelming consumer demand so far from our over one yearstest marketing efforts primarily due to its simplicity. If it takes off in a major way, it couldaccomplish the goal to finally create a liquid equity market for homes, just as there have beenliquid stock markets for major big businesses in many countries since over 300 years agoalready.That means that going forward in the future, borrowing using the entire property as collateral willno longer be the only way for people to own homes. The term "foreclosure" may even become SMobsolete when people started to apply borrowing only under the FARJHO proposed concepts,i.e. borrowing only at the member level instead of at the property level.When lesser credit-worthy aspiring home owners have resorted to these new equity financingmethods, what is left for the banks to lend to in terms of conventional home mortgages will bebetter credit quality home buyers/borrowers. More free market based consumer choices willalways be a win-win situation for everyone under uninhibited capitalism.Since using the equity sharing concept to own homes is not new and there have been many othermethods such as SEM (Shared Equity Mortgage), SAM (Shared Appreciation Mortgage), SharedOwnership Scheme, Land Trust, etc. that have been practiced in many countries such as the UK, SMthe US and Australia, FARJHO represents one of the latest methods in a long evolutionaryprocess of this simple economic concept.Social sciences evolve just like how the technology world does. Although the concept of a mobilephone has been around for quite some time, the actual business method developed to implementthe concept has improved from a Motorola platform shoe sized cell phone used by Gordon Gekko SMin the movie Wall Street to the latest iPhone 4S introduced in 2011. So is FARJHO as a newbusiness method compared with many other previous shared equity schemes or sharedownership methods to own homes using the old simple equity sharing concept. SMThe distinguishing features of FARJHO as a new business method are three fold: SMFirst, FARJHO allows home occupiers and property investors to own only one home at a timein order to maintain the sanctity and the freedom of the single family residence ownership. This isin sharp contrast to many community oriented equity sharing methods of Co-ops, Land Trusts,Kibbutz or Commune types of older equity sharing methods. SMSecond, as a brand new concept, FARJHO only allows member level debt financing, toeliminate the foreclosure possibility which exists with conventional property level debt financingsuch as those in a SEM, a SAM or a Shared Ownership type of other existing equity sharingschemes. Home occupiers could still get foreclosed when they lose their monthly incomecapability under those older arrangements. -4-
  5. 5. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.org SMThird, FARJHO provides a natural built-in buffer to conventional renting to avoid potentialeviction when the tenants temporarily lose their monthly income capability. SMThe equity stake of the renter/co-owner of the FARJHO structure could act as an optionalvoluntary collateral against missed monthly rent payments and therefore provides propertyinvestors with enhanced investment security through less credit risks and at the same timeprovides the tenants/co-owners with more home occupying stability during the rainy days in theirworking lives.All these new features were specifically designed to make the new home ownership structure of SMFARJHO more than simply an attractive financial investment vehicle for property investors.Among its main goals is to also provide neighborhood stability and social harmony by eliminatingthe possibility of foreclosures and reducing the likelihood of eviction for home occupiers.These features will be examined in more details in the following sections.2. What Is A Basic FARJHOSM Structure? SMFARJHO (Flexible And Reversible Joint Home Ownership) is a real home ownershipservice provided by Newport Beach, California based InvestorsAlly, Inc. and its non-profitaffiliate PeoplesAlly Foundation through the Internet portal site http://www.farjho.com. Asmentioned earlier, FARJHOSM is an offshoot from the R&D work on SwapRentSM embeddedFARM (Flexible And Reversible Mortgage) product. The new name reflects the fact that SMFARJHO is meant to be a new way of home ownership structure that uses all possiblefinancing methods in an innovative way, either equity or debt, not just another mortgageproduct that relies only on debt.At the present time, there are many opportunities for investors who are positive about thelong term eventual recovery of the US real estate market to invest for the long term inforeclosed or distressed single family residences in many worst hit neighborhoods in the USsuch as California, Nevada, Arizona and Florida. FARJHOSM was created as a new improvedway of shared equity based home ownership to allow institutional money to come in byletting tenants and property investors co-own the properties in a legal entity such as aLimited Liability Company (LLC) structure in the US so that there would be a positive yield ontheir investments, similar to a real estate syndication process on commercial properties butwith much more scaled down expenses and procedural complexity.Due to its simplicity, this new commercialized service is ready for use by investors andhomeowners without having to rely on the participation or any involvements by the federal,state, local governments or banks and major financial institutions on Wall Street. It is indeeda Main Street solution created by, operated through and designed for the common people onMain Street. It is a perfect and timely way to finally be able to bring housing finance from theharmful hands of Wall Street back to the common people on Main Street, given howcapitalism has been abused by the privileged few on Wall Street within the past few decades.A common base structure for the US market is currently composed of a simplified real estatesyndication process using an LLC legal entity. Each structure will be put together by asyndicator with up to a total of perhaps 10 members in the LLC. One of the co-owner -5-
  6. 6. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgmembers will be renting the property from the LLC and will treat the property as his/her ownprincipal residence.For example, a home seeker could identify a property in a particular geographical location.Instead of using a down payment say 5, 10 or 20% of the property value to apply for aconventional mortgage, which under most current circumstances he/she would not bequalified for these days, he/she could join a group of property investors to co-own theproperty in this all equity based syndicated LLC structure to co-own the home property. Thenhe/she would simply pay a free market level rent to the LLC.Although further financing using the property owned by the LLC is always possible as avariation of FARJHOSM if all members of the LLC so desire and approve, it is not arecommended structure. The intention of FARJHOSM is more to help tenants becomehomeowners through a minority stake ownership in the jointly owned LLC in order to have askin in the game. A pure shared equity based structure without borrowing at the propertylevel provides the long term social stability for home ownership and increased true housingaffordability. Borrowing, if any, should be done only on an individual basis before each of themembers come to the table with ready cash to form the FARJHOSM LLC to acquire the homeproperties.Since tax considerations are entirely passed through to each of the members in an LLCentity, there is normally no point in using further leverage at the LLC level. The use ofmoderate, reasonable and/or temporary borrowing for temporary cash flow managementpurposes could be considered but should never be done to the degree that negative yield ornegative cash flow occurs in the life of a FARJHOSM structure ownership period.Tax advantages are man-made by nature. They reflect a government’s housing and propertyinvestment policies at any given point in time in human history. Better tax treatments mayfollow prudent government policies when the economic benefits of innovative housingfinance methodologies are more fully understood and accepted by the consumers in thefuture.For the time being, there do not seem to be any disadvantages for any participatingmembers of the FARJHOSM LLC. Under the existing tax rules, property investors including thehomeowner/occupier could manage the interest deduction individually since the rentalincome will pass through to each of the US based LLC members. For thehomeowner/occupiers in the FARJHOSM structure, due to their dual roles, they could inaddition take advantage of the tax benefits of principal residence such as interest deduction(if they had borrowed for their portion, an unlikely and not recommended scenario) andcapital gains tax exemption for the portion of the equity that they own in the LLC. If they areinterested in getting more of these conventional tax advantages, they could either decide tohave a larger share of their equity holding in the LLC or simply switch to a completeownership through conventional mortgage borrowing anytime they want, as long as they areable to afford it and be qualified for the loans. SMFARJHO will serve as an additional complementary consumer choice to increase housingaffordability under free market principles, it is not meant to replace any housing financemethods already in existence. It will only become a Joseph Schumpeters creativedestruction to replace other older home financing methods if its new economic value isproven and adopted by the consumers through further public education and awareness. Fornow it serves as a perfect alternative when homeowners either cannot afford theconventional borrowing or are not interested in the conventional burden of debt. -6-
  7. 7. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgBuy-out arrangements when desired, could be customized and structured in each individuallysyndicated LLC between members in the LLC operating agreement of the LLC to servedifferent purposes of each of the members. However, these buy-out arrangements on thevery same property could be cumbersome, inflexible and mostly unnecessary when othermethods could be much more effective and efficient. For example, a home occupier in a SMFARJHO LLC structure already could simply more flexibly and reversibly buy into aneighbors FARJHOSM LLC structure if he/she simply wants to increase or decrease his/herinvestment exposures to the local property market.Furthermore when SwapRentSM transactions become available at a trading exchange or atthe peer-to-peer Internet portal site REIDeX.com in the near future, the flexibility andreversibility features as well as the benefits of FARJHOSM will only get to fully presentthemselves at that time.Since one of the main new economic benefits of both FARJHOSM and SwapRentSM is to helpproperty owners separate the investment value from the shelter value of owning a real estateproperty and manage them separately, SwapRentSM being financial derivatives based, offersa much easier, efficient, effective and low cost way to manage the investment value ofowning a real estate property than simply buying and selling the FARJHOSM LLC memberinterests on the very same property among the LLC members or even buying and sellingmember interests from other neighbors property FARJHOSM LLCs.3. How and When to Apply FARJHOSM?The following examples are on how to use the new FARJHOSM structure to apply the neweconomic concept of the separation of shelter value (use or usufruct value) and theinvestment value (economic value) of a conventional ownership of a real estate property.Example 1 - From aspiring home owners perspective:A home seeking person who currently rents identifies a property in a geographical area ofhis/her choice. He/She has the 10% (or any number between 1% to 99%) of the property incash from his/her own savings and would like to seek to jointly own the property with otherinvestors as the ideal home owning structure.The reasons could be because that he/she may not have enough monthly income to qualifyfor a conventional mortgage, prefers to use the discretionary monthly income for otherhousehold expenses, does not think the property value may increase in the near term, isdirected by his/her particular religious belief that rejects the lending/borrowing concepts orsimply due to any other personal preferences.He/She commits to pay a pre-agreed rent payment to the FARJHOSM LLC that holds the titleof the property for a specific period of time. The remaining 90% property ownership could beshared among up to say, nine other individuals, corporate, institutional or even governmentalentities in any proportion.In this example, 10% of the monthly rent payment received by the FARJHOSM LLC will alsobe distributed after deduction of proportionate expenses back to the tenant/co-owner.Example 2 - From joint property investors perspective: -7-
  8. 8. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgA group of investors have identified and bought a particular single family house at a bargainprice through a syndicated LLC structure either through a short sale process or from a bank’sREO portfolios.The syndicator of the FARJHOSM LLC tries to find a long term tenant of this single familyhouse in order to generate stable long term rental income. This could be because none ofthe investor members has a plan or desire to use the property as their own home. Theinvestors interest is only treating it as an investment.Since many tenants do not commit to the long term and do not usually care about the housesthat they rent, it would be nice if the property owners could somehow offer the tenant apartial ownership interest so that the tenant would want to take care of the property asthough it is his/her own.The syndicator/property manager makes an offer to a qualified tenant who has the ability tocome up with the cash to pay for a small percentage (any number between 1% to 99%) ofthe property value and invites him/her to join the LLC as a minority stake holder/memberhimself/herself. Once the tenant becomes the minority homeowner, he/she may intend tostay for the long term and would treasure the property and take good care of it as thought itwere his/her own. In fact it is indeed his/her own shelter-wise, albeit partially in a financialsense. Although he/she does not have the economic income capability normally required toown the property entirely he/she gets to enjoy the high quality home in the neighborhood ofhis/her choice.Through buy/sell agreements between LLC members as one of the methods, thehomeowner could increase his/her equity ownership through buying existing member’sinterests. Alternatively, he/she could use SwapRentSM contracts to do so when the SMSwapRent contracts become available at REIDeX.com in the near future. Since the SMSwapRent contract is a form of financial derivatives, it is a more efficient, effective and lowcost way to make real estate property investment then simply buying and selling FARJHOSMLLC member interests.In the worst case scenario, he/she could also become a LLC member in another property inthe same neighborhood whenever he/she has the increased economic ability to do so andwould like to have more investment exposures. It would be a pure financial investmentdecision to be made separately since it has nothing to do with the shelter interest of thehouse they already occupy with the full use of it.Comparing with conventional commercial property investments, FARJHOSM offers propertyinvestors less worries about vacancy and expenses. In commercial real estate investmentlingos, the investor’s SGI (Scheduled Gross Income) equals to his/her GOI (Gross OperatingIncome) and also to his/her NOI (Net Operating Income) since both annual vacancy loss andexpenses are most likely zero in a FARJHOSM structure to own the property.Example 3 - Current applications in the US:A homeowner currently owes in a mortgage more than the value of their house. He/Shecontemplates a strategic default on his/her own house but does not like the idea of becomingan apartment renter. A buy-and-bail strategy sounds more appealing to him/her. He/Shecould use an all equity based FARJHOSM structure to become the minority owner/renter of analternative property in his/her neighborhood before he/she begins discussions with his/hercurrent mortgage lending bank to give up his/her existing homes in either a short sale or aflat out walk-away foreclosure. -8-
  9. 9. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgThe strategic defaulters usually could not secure another mortgage to buy anothercomparable home before or after he/she walks away from his/her existing home. To qualifyfor a new mortgage on a second home, he/she has to either have 25% to 30% net equity inhis/her existing home or a very large fully documented monthly income to qualify for themortgage payments of two homes. This is often not the case with most homeowners in thecurrent economic environment.An all equity based FARJHOSM co-ownership structure makes it convenient for a smoothertransition to a long term comparable or even nicer and often more spacious home through apartial equity ownership without having to lose the homeowner status by becoming aconventional apartment or house renter. It may turn a somewhat embarrassing, face-losingevent into a move-up in prestige as a partial owner of a much bigger and nicer house in abetter neighborhood!Example 4 - How to use borrowing to achieve leveraged higher investmentreturns under FARJHOSM:In a FARJHOSM transaction, each individual member co-owner can decide whether to borrowfor their portion or not. Cash rich investors do not have to borrow. No group decision oraction to borrow together is necessary. If some of the co-owner members want to borrowindividually for themselves, then the borrowing leverage (LTV) is up to each of the membersindividually and their individual lenders using their percentage ownership in the legal entity orthe corporation as the collateral.So lets say a Texas home which is worth $100,000 is being bought by a FARJHOSM LLC.Three members, A (20%), B (40%) and C (40%) pooled the capital to form the LLC to beginwith so that the LLC had the money to buy the home. The LLC did not and will not borrowany money or use the property as collateral to borrow any more money. Since neither the SMFARJHO LLC nor the home property itself owes any money, therefore there is no possibilityof a foreclosure of the home property, ever!Member A was supposed to be the home occupier (AHO), so he pays the LLC a marketbased rent every month for 3 years say in a 3-year lease as an example. It could be anylease maturity and will be negotiated and agreed by all the members in the LLC.In terms of borrowing, Member A did not borrow to come up with the $20,000 since as thehome occupier he wants stability. Cash ownership by him also injects confidence to other co-investors in the LLC. Member B does not like to be burdened by the debt service so he didnot borrow to come up with the $40,000 cash either. Member C likes to punt and stronglybelieves in using leverage to achieve high returns. On the other hand, he does not haveenough 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 collateralfor the lender. The leverage that Member C uses is 75% LTV of his partial member interest inthe LLC and his down payment equals to 25% of the value of that partial member interest inthe LLC.So in the example above, pooled cash was used to purchase the property entirely and noborrowing using the property as the collateral was involved. Borrowing activity, if any, will beconducted only at the member level at each members discretion only. That is exactly thespirit of how the new FARJHOSM concept and method to own homes that could be used to -9-
  10. 10. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgeradicate the foreclosure possibilities, irrespective which country the homes or the homeowners are located.Example 5 - Section 8′ed FARJHOSM - AHOs who are Section 8 rent paymentassistance recipientsSection 8 rent payment assistance program is a US federal government sponsored programthat offers monthly rent payment assistance to low income working families based on theSection 8 of the United States Housing Act of 1937. The program will be explained in moredetails in a section below.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 familiarwith and she thinks those Wall Street stuff are too risky. She wanted to use it to buy a homebut the amount is not big enough to buy any homes in Southern California in an all-cashdeal. She can not use it as a down payment to borrow any mortgage because no lenderswould be interested in talking to her due to her low income status. The lenders do not believethat she could generate enough monthly income to service a mortgage payment.She heard about the new Section 8′ed FARJHOSM program from the local housing authorityof her city. She found out that she could team up with a few free market based Joint PropertyInvestors (JPIs) to form a FARJHOSM LLC to buy a home together and get the new homequalified as a Section 8 property. She could then simply apply the rent payment assistancefrom the existing Section 8 program as the rent payments to the FARJHOSM LLC. In this wayshe would not only just be a tenant but also become a partial home owner under this SMFARJHO arrangement.Since she is not restricted to renting from a multi-family apartment complex in the run-downdistricts only, she decides to buy a REO single family house from the Fannie Mae Homepathprogram in a decent neighborhood as her dream home. The cost of the house is $300,000 ina city in Southern California. In this FARJHOSM structure she would own 1/6 of the equityownership of the FARJHOSM LLC.The remaining balance of the house price was paid by five other free market basedinvestors. Investor A and B who put in $30,000 each are individuals using their retirementmoney in their respective IRA accounts. Investor C who put in $100,000 is a local publicemployee pension fund. Investor D is a foreign individual and he put in $40,000. Theremaining $50,000 was put in from an individual property speculator who prefers to useleverage to enhance the potential investment returns. He put down $10,000 cash andborrowed $40,000 so that he could deduct the interest expense for this investment.The Section 8 recipient gets $1500 monthly rental assistance from the Department ofHousing and Urban Development (HUD) every month. She contributes an additional $200 soher total monthly rent paid to the FARJHOSM LLC is $1,700. This equates to an annual rentalyield of 6.8% to all members of the investor group in the FARJHOSM LLC which the Section 8recipient/renter herself is also a member of. That is her annual investment income for eachyear she stays in as a 1/6 interest member. In addition, she will also enjoy the financial valueof 1/6 of the potential appreciation of the home property.The free market based investors are interested in teaming up with the Section 8 recipientover other regular higher income Aspiring Home Owners (AHO) because they might think, -10-
  11. 11. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgrightfully or wrongly, the credit risk is much lower since the bulk of the income rent paymentswould come from the assistance of Uncle Sam!4. Creating and a tradable equity market for home ownershipand making Single Family Residences (SFR) an investable assetclass for institutional investorsIn the current market in Southern California as of November 2011, through FARJHOSM, aJoint Property Investor (JPI) could expect between 6 to 9% or even higher annual currentdividend yield from the rental income in a typical 2 year or 3 year residential real estate leasewhile waiting for the market recovery and further price appreciation of US residentialproperties without worrying about vacancy or excessive annual operating expenses. Thetotal returns, which are cumulative annual dividend yield plus the holding period priceappreciation, could be quite significant due to the potential price rebounds from manydistressed and foreclosed properties.The more popular this type of non-debt, fractional interest equity investment to attract freshcapital injection from around the world to jointly own homes in certain local communitiesbecomes, the more likely the property market will indeed be restored to its previous valuewith a "non-leveraged stable growth" sooner. Homeowners would also get to enjoy the socialstability at the same time.Academically, one of the main economic benefits that both FARJHOSM and SwapRentSMcontracts, each in their own different ways, provide to investors is to make Single FamilyResidences (SFR) income producing assets (with a stable positive yield like that of owning arental apartment) and hence made investable by professional institutional investors. It wouldbe a great way for pension funds and insurance companies to diversify their portfolios furtherby extending the investment choices into currently the worlds largest asset class throughthese new innovative investment vehicles.The state, county (and city) public employees and teachers pension funds would be goodexamples of potential candidates to become the anchor local institutional property investorsto help state residents and local homeowners to co-own homes through the new FARJHOSMconcept in order to foster local economic revivals and continuing prosperity. They could ofcourse resell those FARJHOSM LLC member interests to other free market investors at anytime in order to regenerate and scale up the scope of available capital.Attracting fresh capital from around the world this way to local communities could certainlyhelp the state, county and city governments fix their current budget deficits under a freemarket mechanism. In reality, these proactive efforts and involvements by the localgovernments to attract free market investors money are similar to what most of them havealready been doing through their economic development agencies on the commercialproperty side. It is a much better method than those redevelopment agencies that only relyon a handout from the federal government using tax payers money through block grants.Policy-wise, the simple new economic concept is that people would need to start thinkingoutside the box, borrowing money using properties as collaterals to own homes should notbe the only way to own homes. Promoting home ownership for social good purposes could -11-
  12. 12. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgalso be accomplished through partial equity sharing, just like how corporate ownership hasevolved in the last few centuries with the development of a stock market in each country. Itmay be about time that we should seriously treat equity financing and developing a tradablesecondary market of home equities as a viable way to promote home ownership.In addition, with the introduction of the separation of shelter value from the economic value(or usufruct value from the investment value) of owning a real estate property by the new SMSwapRent related methodologies and its secondary market REIDeX.com, boom and bustcycles created by the investment value of properties and exacerbated by the abuse oflending/borrowing could easily be avoided and homeowners could get to enjoy the socialstability as long as they stick to the shelter value part of their home ownership and treatwhether to invest in home equity or not as a totally separate issue.Therefore, the interesting concept to note again is that the residential SwapRentSM and SMFARJHO applications on Single Family Residences (SFR) basically make SFRs similar toinvestable income-producing assets like multi-family apartment complexes and should hencebe treated like any other commercial properties for institutional investments by pensionfunds, endowments and insurance companies, etc. going forward.5. From the old Pool-Borrow-Buy (PBB) equity sharing conceptto the new Borrow-Pool-Buy (BPB) concept - A simpleinnovation in housing finance that could eliminate homeforeclosures all togetherIn the current practices of our Western banking industry and our real estate investmentindustry until today, people always use the property directly as a collateral to borrow moneyto purchase and own a real estate property. Tax codes were also often designed by thelawmakers to give preferential treatments to investors who have borrowed using the propertyas collateral to invest. This has caused severe financial crises and social instability again andagain in history when the lending standard had been loose and when certain participantsabused the system.As far as the equity sharing or shared equity concept goes, it is usually a quite commonpractice in commercial property investments rather than residential real estate investmentssuch as home purchases. This is due to the fact that commercial investment projects areeither of a larger investment amount or they are usually made for investment purposes only.People are used to pool money to purchase a commercial income producing property or agroup of properties.Unlike commercial properties, many purchase decisions of homes are made more forsheltering reasons. Home owners could also afford to own the home directly without otherinvestors help since the investment amounts are usually much smaller when compared withcommercial property investments. In addition, home owners usually have a natural desire tohave full control of the property.The problem with using the property as the collateral to borrow in the old shared equityproperty financing method of Pool-Borrow-Buy (PBB) is that if the property value declines, itmay automatically trigger a massive selling either voluntarily or involuntarily, which will feedon itself and create a market collapse. It makes no difference whether there are any equity -12-
  13. 13. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgsharing in the down payments or not. Foreclosures will happen either way and hell will breakloose either way. The equity sharing concept as practiced in those older methods weretherefore naturally deemed useless.For commercial real estate market, foreclosures usually immediately create an economicproblem. For the home ownership or residential real estate market, it will present not only aneconomic problem, but also a severe social problem as well. These problems have beenclearly illustrated in many of the financial crisis events within the past few years in manyoverstretched Western countries.Therefore, in my personal view, sharing equity as down payments only in order to qualify forborrowing or to borrow even more will not help much economically and contribute almostnothing socially to home ownership in our society since borrowers could still be subject toforeclosures. It is a quick superficial short term fix to increase fictitious housing affordabilityand it may end up promoting even more un scrupulous borrowing.Unfortunately these SEM (Shared Equity Mortgage or Modification), SAM (SharedAppreciation Mortgage or Modification) or factional interest home equity investment schemesare exactly what have been touted by many other practitioners, governments and academicsalike until today. They have not so far been well received by consumers. Those structureswill not solve our countrys home financing and home ownership problems socially oreconomically over the long term.Governments who set up policies using those ill-advised primitive methods (e.g. the originalHOPE for Homeowners proposal in 2008) have only destroyed peoples confidence in theequity sharing concept to solve the problems and let the mortgage foreclosure problemsdeteriorate further day by day. The Hope for Homeowners (H4H) Program is a loan programthat was a part of the Housing and Economic Recovery Act of 2008. The guidelines for theproduct were released by FHA on October 1st, 2008.In the original HOPE for Homeowners (H4H) offering, the Federal Reserve together with theHUD Team proposed a non-free market based arbitrary equity sharing scheme for debtprincipal reduction as (Ref 3)100% if the property is sold after 1 year80% if the property is sold after 2 year70% if the property is sold after 3 year60% if the property is sold after 4 year50% if the property is sold after 5 yearThere were few takers. Any further consideration by other national policy makers andeconomists of using equity sharing related concepts to solve our countrys severe housing-led economic problems on a large scale also quickly died with it too for now. Theincompetence of these policy makers is indeed very unfortunate and lamentable. Theworrisome part is that even when the top level politicians change posts later on these sametechnical middle level managers may still be the ones that will continue to squat on the samepositions at the Fed and at the HUD since these subject matters may be deemed tootechnical for the top level politicians or top level policy makers to mess around with. -13-
  14. 14. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgWhy is FARJHOSM different? The three differentiating concepts created by the new SMFARJHO (Flexible And Reversible Joint Home Ownership) structure are again:First, it corporatizes home ownership one home at a time so that it will create a familiar andconvenient legal vehicle for other investors to share the equity of the home property with thehome occupier who is also a co-owner of the property.Second, it offers the real estate investors a chance to use leveraging to enhance investmentreturns through a new Borrow-Pool-Buy (BPB) concept over the conventional Pool-Borrow-Buy (PBP) concept used in equity sharing methods which has been practiced until today forboth commercial property investments and most of the other home equity sharing schemesor some other proposed factional interest home equity investment and financing schemes.Thirdly, it provides an enhanced stability for the home occupier through a voluntary featureoffered by the Aspiring Home Owners (AHOs) to the other Joint Property Investors (JPIs) touse the AHOs equity stake in the FARJHOSM LLC as a buffer for JPIs to deduct the missedmonthly rental payments by the AHO so that the AHO would not be evicted so easily until thebuffer runs out.It therefore offers much more home occupier stability than any other rental arrangements. Byusing the new BPB method, it means that the fractional or partial owners in a home, eitherthe Joint Property Investors (JPIs) or the Aspiring Home Owners (AHOs) could all have achoice to borrow against their individual member interests in the FARJHOSM LLC structure sothat they could pool the money to purchase and own the home property in cash together.The AHO who will be the sole home occupier will simply pay the legal entity property owner SMFARJHO LLC a free market based monthly rent similar to a usual tenant of the property.When home ownership and housing finance practice have been transformed into this new SMFARJHO way, pretty soon there would not be any home foreclosures any more. It wouldindeed be a pioneering innovative effort for the proactive banks, credit unions or any othermortgage lenders to think outside the box and consider to start lending to the FARJHOSM LLCmembers using their individual member interests in the FARJHOSM LLC as the collaterals.Even a new type of non-profit oriented cooperatives could be set up for this member levelfinancing purpose that could help aspiring home owners both in terms of debt and equityfinancing. Instead of the usual names of a Credit Union or a Savings & Loans that arecommon in the US, these new entities could be called a Credit and Home Equity Union(CHEU), a Savings, Home Equities & Loans (SHEL) or simply a Credit and Home EquityCooperative (CHEC) for example.If and when any of the LLC members ever loses his/her monthly income capability, he/shecould either sell their member interests to other free market based investors or let it beforeclosed by the lenders individually. Therefore either a new free market based investor orthe lending bank would replace the defaulting co-owner and become the new co-owner withthe current home occupier/co-owner (AHO) and all other joint property investor (JPI) co-owners.Lawmakers in many countries could certainly consider passing a law to request all homelending to be conducted under this FARJHOSM based concept of member level lendingthrough a transitional implementation period. Therefore it seems there could be many -14-
  15. 15. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgpolitical credits to be claimed for if any politicians who could champion these new ideas andmake the necessary efforts to make it happen in each country in order to create increasedneighborhood stability and enhanced social harmony in his/her country through theelimination of foreclosure possibility in a new home ownership structure.In the US, there could be another great opportunity for any aspiring statesman to championto waive the annual LLC franchise fee for low income working families so that it would bepossible for them to use the convenient LLC structure to corporatize their homes under the SMFARJHO concept and method.Using the $800 franchise fee that is required in the state of California as an example, it maynot be a major cost factor percentage-wise for $2 or $3 million coastal mansions in OrangeCounty but it would easily become a heavy burden for the partial homeowners in a $100,000or $200,000 homes in the Inland Empire area in Southern California.In addition, it may also be a very helpful way to encourage AHOs and JPIs to participate in SMFARJHO transactions to own homes together if Congress proceeds with their intended planto phase out the current home mortgage interest deduction tax provision (Ref 4) in order tohelp cut budget deficit. Since neither AHOs nor JPIs would need such a provision becausethey could already deduct the interest payments from the rental income if some of them haveborrowed individually using their FARJHOSM LLC member interests to own their portion of theproperty ownership. It would indeed be a politically win-win proposal.6. FARJHOSM combined with Section 8 rent assistance in the US- Section 8ed FARJHOSM!As explained in the example above, Section 8 rent payment assistance program is a USfederal government sponsored program that offers monthly rent payment assistance to lowincome working families based on the Section 8 of the United States Housing Act of 1937.The program provides monthly payments of rental housing assistance to private landlords toassist about 3.1 million low-income households currently (Ref 5).One of its largest program offers tenant specific rental assistance. A low income tenant canmove with existing rental assistance provided through a local housing authority from onerental apartment to another approved rental apartment or even another single family house ifthe single family house gets qualified.We have been on the lookout for developing more FARJHOSM and SwapRentSM basedhousing affordability programs for PeoplesAlly Foundation so that the new economic benefitscould also be extended to low income working families based on a free market basis. Itseems that there potentially could be a great match.One of the very convenient ways for Joint Property Investors (JPIs) to make lower riskinvestment through FARJHOSM LLC structures is to pair up with the Section 8 recipients ineach state as the AHOs (Aspiring Home Owners). Since the rental income is provided by thefederal governments Section 8 program, these potential partial home owners who are lowincome working families will present much lower credit risk in rent payments than otherregular low income renters. -15-
  16. 16. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgThrough the Section 8ed FARJHOSM program, PeoplesAlly Foundation could make theassistance money for the working poor already committed by the Congress to work muchmore efficiently. It will not incur any more taxpayers money while being able to promote moreneighborhood stability and social harmony from much reduced incidences of landlord-tenantsdisputes by simply turning renters into minority co-owners.As explained above, Section 8 rental assistance payment recipients could already choosewhere they want to live. The program has become a tenant oriented assistance programsince 1998 rather than building specific as in the past or as in many other affordable housingprojects which are often plagued by many social problems.What if some of these recipients have worked hard and earned some savings or inheritedsome small sum of money? Lets say it is $20,000 (could be any reasonable amount). It isnot large enough to buy a home here in Southern California and they can not use it as adown payment to borrow a mortgage to buy a home with a 100% ownership since they havevery low income to service any loan.Why not let them own a piece of the property that they rent through the FARJHOSM structure?It would be a win-win for the Section 8 rent assistance recipients and the landlords. Byhaving a part of the ownership, they would treasure and love the homes that they rent fromthe Section 8 approved building landlords. They would get to have a percentage of futureappreciation value of the property that they own and they would take care of the propertiesas though it is their own.Most importantly, it would develop a sense of pride and self prestige that they may havebecome a proud home owner (although partial) and be a more useful and stable member ofthe local neighborhoods that they reside in. That could be one of the best features (theinvisible hand?) of capitalism at work made possible by the new FARJHOSM home ownershipstructures. Landlords would for sure no longer have as many problems with the tenants asthey once did!Furthermore, since the Section 8 recipients could choose where they want to live, they nolonger have to reside in multi-family housing complexes. It is a perfect chance for some ofthem to choose a dream house to buy through FARJHOSM from the pools of HUD REOs,Fannie Mae Homepath REOs and Freddie Mac HomeSteps REOs so that they could helpthe US governments clear those massive unsold foreclosed home inventories.This could be a perfect way to help the working poor in America realize their Americandreams without using any more of the tax payers money or repeating the mistakes of manyof the much more dangerous mortgage variations and/or securitizations.7. Applying life insurance policy to FARJHOSM - ColiedFARJHOSMThere are many variation possibilities to add on some bells and whistles to the basic form ofa FARJHOSM LLC structure for the benefits of sophisticated consumers under the currentlegal infrastructure in the US.A simple example could be the use of life insurance policies for AHO and JPIs members of a SMFARJHO LLC. For example, it is very easy to create a new product called Colied SM SMFARJHO as one of the optional features for potential FARJHO LLC members. -16-
  17. 17. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgColi is the acronym for "Corporate Owned Life Insurance" on employees. They may also becalled a Boli "Business Owned Life Insurance" or an Eoli "Employer Owned Life Insurance"policy.The value proposition is that if a member of the FARJHOSM LLC passes away during the lifeof a FARJHOSM structure, then the life insurance proceeds could be used for the buy-out ofthe interests of the deceased member by the rest of the FARJHOSM LLC members.Since the use of Coli has been a bit controversial by many corporations in the past,irrespective of the fact that it is perfectly legal and even ethical when applied prudently, itmay not be a good idea to promote it before the basic form of FARJHOSM has alreadybecome a wide spread success.Sophisticated and informed consumers may see the economic and social benefits of such anarrangement and they may choose to have it in the future as time elapses. Then similarstructures could be easily arranged as a standard optional feature to have it applied topotential LLC members of a FARJHOSM LLC structure when the participants are all eligibleand have unanimously voted in favor of it.More prudent consumer choices on a free market basis would always be a good thing.8. The "Bernanke Arbitrage Trade” - fellow rich Americanshelping fellow Americans own homes as a brilliant investmentopportunity for themselvesTo illustrate that the new FARJHOSM structure and its associated transactions could self-finance the various intended economic and social objectives of aspiring home owners, jointproperty investors and governments, etc. on a pure free market basis, we will have to firstdemonstrate how investors could proactively take advantages of these new innovations andbenefit from them without any government involvement or assistance via tax payers money.This way new and fresh capital will be injected into local communities throughout thecountries voluntarily by investors from anywhere around the world to revitalize the localeconomic prosperity. Furthermore, the unpopular reliance on foreign and outside capital isnot even necessary. Within local communities themselves, an easy financial arbitrage couldbe established by current home owners who have paid off their original mortgages on theirown properties, assuming they have some income sources to secure a new mortgage ontheir current properties. Alternatively, any homeowners who have existing excess homeequity to do cash out refinance could also take advantage of these timely arbitrageinvestment opportunities while mortgage rates are still at all time low.In light of the tight credit market for home owners in the US, this is an excellent example onhow rich home owners could help their less fortunate neighbors so that people togethercould help revitalize the local economy by themselves on Main Street. They will not be doingit on a pure charitable basis. They will make money and do well while doing good.For example, there are many wealthy people in Southern California who own multi-milliondollar homes along the coastal area from Malibu, Pacific Palisades, Beverly Hills, ManhattanBeach, Newport Beach, Laguna Beach down to La Jolla in San Diego. Many of them do noteven have a mortgage or with a very low outstanding balance. -17-
  18. 18. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgOn average many decent homes in these exclusive coastal area are worth above two milliondollars. It may be a good idea for some of them to have a cash out refinance to put their idlehome equity to work. Say they could simply borrow only one million dollars (50%) from theirtwo-million-dollar home and use that money to invest in a partial ownership through amember interest in a FARJHOSM LLC deal to help some other less fortunate fellowCalifornians to partially own homes? One million dollar cash could probably help financethree or four FARJHOSM transactions in the Inland Empire area for example, where averagedecent homes could sell for only around $300,000.This is by no means just a charity work for these rich property owners. They could potentiallydo very well and become much richer over the long term by doing good this way. At todayswriting in mid-November, 2011, the level of a 15-year fixed rate mortgage is about 3.38% anda 30-year fixed rate mortgage is about 4.02%. In a FARJHOSM deal the current market rentalrate comes up to be between 6% to 9% of the house value annually and could be evenhigher in certain area. The net positive carry could range between 2% to 4% after expensessuch as property taxes and insurance premium annually.Generically speaking, that means if a rich home owner with a $2 million home borrows afixed rate mortgage of $1 million (50% LTV) and invests the cash as a JPI (Joint PropertyInvestor) to help 3 to 4 other AHOs (Aspiring Home Owners) to buy homes through the SMFARJHO structure, he/she could earn a minimum net spread of between 2% to 4% on theone million dollars every year for the next 15 or 30 years while turning his $2 million homeequity in his current property into a total equivalent of $3 million home equity to enjoy thepotential price appreciation for the next 15 or 30 years.If or when home prices start to go up anytime within the next 15 years or 30 years, he/shecould simply unwind the trade by selling the homes he/she invested in when agreed by theAHOs, selling only the FARJHOSM member interests to the AHOs or to any other third partyinvestors in order to take profit. He/she can then use the proceeds (much higher than $1million by now) to pay off the original $1 million loan (either amortized outstanding balance ora balloon depending on how he/she had financed). He/she could have the choice of usingeither an interest only loan or a fully amortized loan for this 15 or 30 year fixed ratemortgage, with some benefits trade-off of course. A 30 year fixed rate mortgage could bringthe combined monthly interest and principal payment down further than a 15 year fixed and anet positive annual income yield could usually be higher when the mortgage payments areamortized. 15 year fixed rate on the other hand would have a much lower monthly paymentswhen an interest only payment arrangement is adopted.Even if prices do not appreciate during the holding period in the future, the investmentstrategy could still be viewed as a low risk alternatives to other investment opportunities aslong as there are positive “carry”, i.e. net positive yield every year that results in actualincome every year during the holding period.There are also justifiable tax oriented incentives such as the home mortgage interestdeduction for unlocking this primary residence home equity through a moderate leveragingfor those wealthy people. As long as they stick to either the 30-year or 15-year fixed ratemortgages so that there would not be unnecessary interest rate risk in the future, it could bemade a very prudent investment option for them.The main social benefit out of this proposed investment strategy and the timely creativeapplication of the FARJHOSM program is that the local common people on Main Street couldindeed have a chance to control their own destiny by bringing about a local property market -18-
  19. 19. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgrecovery and hence the local community economic revival while the money-influencedpoliticians in Washington DC, incompetent federal policy makers, Wall Street bankers andthe left wing Wall Street Occupiers may continue to fight against each others and amongeach others under a feeble US government leadership for the foreseeable future.Finally, with the dollar depreciation and high inflation almost a certainty in the future as theFederal Reserve continues their loose monetary policy, increased home equity exposureswould very likely outperform most other financial assets in a high inflationary scenario. Thistimely arbitrage trading opportunity arises primarily due to the Federal Reserve ChairmanBen Bernanke and his cohorts championing of a very loose monetary policy and someunconventional methods such as the repeated Quantitative Easing programs known as QEand QE2 to re-inflate the economy which so far have only benefited the privileged few onWall Street, hence to namesake credit of this timely financial arbitrage transaction for peopleon Main Street to be able to benefit from the low interest rates as well.9. Implementation Strategies of FARJHO and SwapRent - goodeconomic stimulus public policy or cornering the real estatemarket by investors for profits?A very obvious winning strategy of implementing either FARJHOSM or SwapRentSM alone ortogether is to simply concentrate the investments and focus on a few selectedneighborhoods in the US, perhaps some mid-sized cities in Southern California as anexample.Lets have a quick review on the economic concepts of the investing dynamics first. Realestate market as an investment asset class is often more about the Beta than the Alpha ascompared to investing in the stock markets. Although that sounds a bit academic to manypeople but what it means is actually very simple. The way the real estate market moves upsand downs depends more in sync with the countrys economy policies made by thegovernment as a whole, even with the consideration of regional economic factors and/orindividual homeowners specific maintenance and caring of their properties. The residentialreal estate market in the US normally behave with a much higher correlation to governmentdictated lending policies and private lenders credit underwriting pratice than individual homeimprovements.On the other hand, listed individual companies could much easily out perform or underperform the US stock market and behave individually based on their own individual earningpower, management merits and demerits, irrespective what the governments fiscal ormonetary policies are.As a result, whenever there is a lack of prudent and wise governments policies, the entirecountrys homeowners and small town businessmen on Main Street in America suffer. Thesupply and demand factor of the residential real estate market has always been solely -19-
  20. 20. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgdetermined in the US by the interest rate levels and the degree of the looseness of creditunderwriting practice for people to borrow to own homes.In the past, local governments or free market based private sector investment companiescould not alter the local market supply and demand factor since the interest rate levels andhome mortgage credit policies have been determined solely at the federal level and by thebig banks on Wall Street since they monopolize the housing finance business.In addition, single family houses are much more difficult to manage than apartments asincome producing investment properties in the past since people who could rent were usuallyurged to buy with or without the ability to service the mortgage loans. As a result, renters forsingle family houses in the suburbs are difficult to find and keep. The arrival of FARJHOSMand SwapRentSM have finally found a way to change that situation.Now through the new FARJHOSM structure, SwapRentSM transactions and their secondarymarkets, local government housing agencies, pension fund managers, free market basedprivate sector investment companies and/or individual investors could finally alter the localproperty supply and demand factor and drive the prices of the local property markets up (anddown if necessary) irrespective of what the federal governments fiscal, monetary andhousing policies are at any given point in time.The very simple concept for local community economic growth is that the more fresh newmoney pumped into the local economy the more likely the local economic activities could berevitalized when the money is put in good productive use. The FARJHOSM structure and SMSwapRent transactions could make this simple economic concept a reality and make theeconomic miracles happen in the local communities without having to rely on tax payersmoney in the conventional fiscal stimulus sense or risking a hyper inflation by altering theinterest levels further in the monetary stimulus sense.First FARJHOSM could help any new home buyers and joint property investors buy morehomes using cash on hands without relying on credit for debt financing and hence createdemand for homes and support the local property price level. Further prudent us ofleveraging could also be done at the member level, not the property level, as describedbefore.Second, on top of the demand created by FARJHOSM, SwapRentSM could help distressedhomeowners hang on to their homes and hence remove the selling pressure in the localproperty markets. In addition, as also explained before in the HFI article on SwapRentSMpublished in December 2009, SwapRentSM could also help speculators buy more propertiesby sharing partial appreciation with other free market investors and hence increase evenmore buying demand for homes through increased capital sources. -20-
  21. 21. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgFurthermore, SwapRentSM could also be used to finance local small business investments byentrepreneurs who are property owners and hence create more jobs. Even rich homeowners who do not need the cash could also take advantage of the free market based SMSwapRent program and hence increase dispensable income and create higherconsumption powers in the local communities. These are the various functions of the SMSwapRent contract in its new potential role to perform as a new economic policymanagement tool for government policy makers beyond simply acting as a new housingfinance method for consumers as it was originally created for. The details of how it couldfunction as an economic policy management tool were more fully explained in the previousarticle in the HFI December 2009 issue.The main reason why the FARJHOSM structures, SwapRentSM contracts and the associatedsecondary markets could work much better in bringing back the local economic prosperitythan the conventional ways of property ownership is that they could attract much more freshnew investors money, in a non-debt equity form, through the ease, the flexibility and thereversibility features with which the real estate investors could manage their investmentsmuch better, faster and cheaper. FARJHOSM and SwapRentSM in a sense will make thepreviously "un-investable" single family houses an "investable" new asset class forinstitutional investors around the world.As of the current writing, most free market based investors are currently apprehensive aboutthe lack of obvious immediate appreciation potential for the US residential real estatemarkets due to the current unhealthy and uncertain government distated economic policies.However, aspiring home owners, local government agencies and free market basedinvestors could indeed create by themselves the demand for properties in the local marketthrough the new methods of FARJHOSM and SwapRentSM.When the more fresh new money has been poured into the local economy, the more likelythe property value would have been driven up, the more free markets investors would befurther drawn to investing in the local markets and the more aspiring home owners fromneighboring communities would also choose to relocate to these local communities to ownhomes. Creating the local property appreciation and economic prosperity in a confinedgeographical area could indeed become a self-fulfilling prophecy.The key concept here is that smarter investors would most likely want to focus all theirinvestments in a few selected neighborhoods with those wise local government officials whowant to help facilitate these investment and economic revitalization processes to attract freshnew money so that there would be enough gun powder concentrated on these selected areato get the bang on the buck to artificially create the necessary debt-free propertyappreciation. With the local property value appreciation and increased new economic -21-
  22. 22. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgactivities, all the current local government deficits, local economic weakness, local residentsjoblessness and the associated social problems could all be eliminated in one fell swoop.In a sense, maneuvering these property price dynamics could be interpreted as cornering themarket for illicit profit by a few individuals to benefit themselves. However if the end resultsare to benefit not the privileged few but the majority of the home owners and other localcitizens in these local communities and the local governments, then "cornering markets"could indeed be euphemized and re-termed "economic stimulus" to bring back localeconomic prosperity instead.In reality, cornering the markets of stocks and bonds was exactly what our federalgovernment and the Federal Reserve Board have successfully tried to do in order to makethe Wall Street folks richer and the big businesses awash with cash in recent years. Perhapsthey had hoped for that there would be enough bread crumbs to fall to Main Street for peoplethere to survive but that did not happen and most likely would never happen.Together the Administrations wasteful fiscal policies and the Feds unconventional monetarypolicies have built up our countrys uncontrollable national deficits. Since the bubble buildingtechniques that the Fed has employed were based on money they did not have, thosebubbles are doomed to burst some time down the road.What they had failed to find a solution for is a viable way to reinstall the debt-free or less debtdependent property-based wealth in local communities and to revitalize the economicprosperity on Main Street throughout the country to make the majority American people richagain. FARJHOSM and SwapRentSM were designed to accomplish just that.If the incumbent Administration officials could not understand and handle this, certainly thenew generations of aspiring politicians should take heed of it before it is too late for ourcountrys economic future.10. Creating a home equity bubble using equity sharingmethods, not debt, like how Silicon Valley blew up tech companystock market bubblesBen Bernanke and the Federal Reserve team please step aside, Silicon Valley please stepup. We need to create some equity bubbles, not debt bubbles, to re-inflate our nationaleconomy in order to save our economic future. In particular, the national policy makers needto learn and use the equity bubble building techniques that the venture capitalists have beenso skillfully creating wealth for themselves, their investors and the entrepreneurs in the pastto apply to and to prop up the local property markets on Main Streets across the country. -22-
  23. 23. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orgMost economists, policy makers and concerned citizens probably have learned by now that itis the damaged credit distribution channels, not interest rate levels, that is blocking theirexisting desperate attempts to re-inflate 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 donot 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 richeven richer and hence created more and more social tension on wealth distribution equalityrelated issues. Federal Reserve with its money pumping policies without the consideration ofits negative effects of creating wealth inequality has hence been the henchman that haskilled the cornerstone of the previously vibrant middle class in America.The only occasions when poor people could get credit is during the occasional irrational timeof asset bubble building periods and when the credit process is being abused. Whenrationality returns, the supply of credit to the poor will come to a sudden halt as is what ishappening 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 thecan down the road to let other people solve the eventual real problems and could at mostbehave like a superficial temporary fix that may lead to much more expanded troubles downthe road. A re-hab together with a new diet to create a new life would probably be a moreprudent problem solving method.Similarly, to re-energize our national economy, we will need to focus on creating alternativeways of financing, other than debt financing, to re-inflate our economy for both the short termand long term problem fixing purposes. As once students of finance, we all know that highrisk ventures are usually financed by equities, not debts since credit is often not available tothose risky ventures. For example, the entire industry of venture capital in Silicon Valley isfocused on equity financing, shared equity financing in corporate ownership, to be precise.That similar equity financing technique is exactly what we need now to re-inflate the homeequity markets and hence our national economy.FARJHOSM and SwapRentSM related new business methods that we provide only represent afew possible more superior business methods to implement this equity sharing orappreciation sharing economic concepts to attract more equity based fresh capital toresuscitate our national economy on a free market basis. In order to make it work, thenational policy makers will need to learn and understand that the goal of rebuilding ournational economy could be done through these equity sharing economic concepts.It does not matter whether the governments choose to use the new FARJHOSM and/or SMSwapRent methods or not. They need to open the doors and encourage free marketinvestors to participate in all kinds of equity sharing business methods that utilize the equitysharing concepts so that there would be enough free market capital to flow back into localcommunities across America to re-create property market led economic booms on MainStreet.Using debt to blow bubbles should not be the only trick up their sleeves. It did not and will notwork anyway since the credit distribution channels will not function properly in bad economictimes no matter how low they make the interest rate levels to be. That is simply the nature of -23-
  24. 24. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.orghow credit works. On the other hand, as long as these new bubbles are not blown up throughOther Peoples Money (OPM), i.e. debt again, it would most likely be Okay for now to get usout of the recession and unemployment for most of the 99% population.Asset bubbles are usually blown up by OPM using debt in the past. It is a dangerous bubblethat could be popped because it was blown up by hot air. Equity induced asset growth couldact more like a hardened molten lava. Once it is cooled and hardened, it does not have topop or shrink back again. This is due to the simple fact that if the asset was purchased byequity without using debt, when price level declines, there would not be any involuntary,forced selling as would be the case if the assets were purchased with debt, i.e. OPM.So the way to make this policy strategy works, the governments will need to recognize theneed to extend all kinds of smart and stupid property equity sharing methods on a massivescale and on a pure free market basis that include property speculators, not just to use theseequity sharing concepts and methods on a limited basis to distressed home owners as aforeclosure avoidance tool only. That concept is similar to the same textbook difference inmanaging macro-economics vs micro-economics. We will need to use these new propertyequity sharing concepts and methods as a new way of doing massive macro-economicstimulus for our country and again, not just a foreclosure avoidance tool offered to limiteddistressed home owners on any preferential basis only.When free market based investors are aware that these proactive innovative economicstimulus 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 participatein, free market based fresh capital will start pouring in automatically to make America richagain. These investors would come in voluntarily simply based on their own views that thegovernment is willing to ramp up the prices and hence a timely profit making opportunity forthemselves.11. Economic stimulus application using equity sharingmethods, not debt and not tax credit, to prop up the housingmarketTaking expedient economic stimulus measures to prop up the national economy as aconcept is a bi-partisan issue and supported by all kinds of economists, even the mostlibertarian ones. The question is really on what methods to use to implement the economicstimulus activities so that the money provided could indeed stay in the local communities onMain Street long enough to create local jobs instead of immediately flowing to investmentopportunities in foreign emerging markets by the Wall Street professionals.So economically,1. the need for economic stimulus activities to revive our national economy is agreed andaccepted by all, although not agreeable on what methods.2. the linkage between a robust local property market, i.e. increased home equity hencewealth for home owners, and local economic prosperity on Main Street is well recognized byacademics and politicians. -24-
  25. 25. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.org3. using more debt to blow up more property, stock and bond market bubbles again will onlybe another temporary fix similar to kicking cans down the road to build up bigger problemsdown the road for other people to solve.4. lowering interest rates further will not benefit the home owners and small businessmen onMain Street since the credit distribution channel has been impaired during most depressedtime periods of the economy.5. pumping more money and liquidity into the system will only benefit the rich further sinceonly the rich has access to even more credit and therefore creating further wealth distributioninequality.6. the rich top 1% in our society, their financial advisors, hedge funds, private equity firmsand even US based multi-national corporations will use the excess dollar liquidity to invest inhigh GDP growth countries such as China, India, Brazil, Russia, Australia, ... etc. to furtherenrich themselves while weakening the status of the US as a worlds superpower comparedto those rising power nations.7. the dollar liquidity created by current monetary policies conducted by Ben Bernanke andhis cohorts at the Fed to date has created more jobs for foreigners than for us Americans onMain Street.and politically,1. the bailout of big banks and Wall Street firms is both unpopular and unwise to the 99% ofour population.2. more Quantitative Easing (the various QEs) has proven to be toxic to everyone but theWall Street professionals.3. raising taxes could be detrimental or even fatal to the remaining careers in Washington DCfor most politicians.4. ramping up more budget deficits hoping to kick the can down the road to the nextAdministration has become more obvious and unpopular to the public.5. creating jobs for foreigners through pumping out more dollars while providing low cost offund to and making the hedge fund and private equity investment gurus richer at ourcountrys expense has been understood by even the most economically illiterate citizens hasdiscredited the Feds reputation day by day.6. destroying American jobs and killing small businesses on Main Street through a lack ofcompetence in the current economic policy makers has created extreme inequality and hasbeen turning our country more and more towards the left and will further the causes of manyvariations of the Occupy Wall Street (OWS) movements.Perhaps it is time for the economic policy makers and their technical staff members to take aserious look at how our country could use the property equity sharing concepts and thevarious free market based business methods developed to date as a new set of economicstimulus tools?It seems to be easier said than done. For one thing, why the economic policy alternativesusing the new equity sharing concepts and made possible by FARJHOSM and SwapRentSMhave not made an impact so far? Without pin-pointing where the problems are theserepeated suggestions could just be further waste of efforts.1. the equity sharing related subject matter may be deemed too technical by policy makersand their technical staff since it is new. -25-
  26. 26. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660 Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.org2. 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 arestill at a stage of thinking about equity sharings micro level application for foreclosureavoidance for distressed home owners only.5. few people so far until this date have realized the importance of connecting these newproperty equity sharing concepts and methods with the macro level application to performmassive economic stimulus on either a national or a local level that would, on a free marketbasis without governments monetary assistance, cover distressed home owners, big andsmall property speculators as well as any other free market based investors alike.Lets hope the presidential candidates for 2012 would take a more serious consideration ofusing these new innovative economic policy applications of the equity sharing concepts andmethods to solve our countrys economic problems in order to acquire a timely politicaladvantage for themselves in the up-coming election.=====================References:1. "First Online Exchange for Real Estate Futures", FOW (Futures and Options World) Week(Page 4), September 2002.2. "The SwapRentSM Transactions for Homeowners, HELM and FARM - A New AlternativeHousing Finance System", by Ralph Y. Liu, Journal of Housing Finance International (HFI),International Union for Housing Finance (IUHF), December 2009.3. "HOPE for Homeowners Consumer Disclosure and Certification Form", U.S. Departmentof Housing and Urban Development, October 1st, 2008.4. "Taking Aim at the Mortgage Tax Break", by David Kocieniewski, New York Times,November 12, 2010.5. "Programs of HUD - Major Mortgage, Grant, Assistance, and Regulatory Programs", U.S.Department of Housing and Urban Development, 2006.=======================Ralph Y. LiuManaging DirectorPeoplesAlly Foundation23 Corporate Plaza Drive, Suite 133Newport Beach, CA 92660Tel: 1-888-388-5432 x 888Fax: 1-888-315-3831PeoplesAlly@gmail.comhttp://www.PeoplesAlly.orghttp://www.twitter.com/SwapRenthttp://SwapRent.com/bloghttp://www.linkedin.com/in/ralphyliu -26-
  27. 27. PeoplesAlly Foundation 23 Corporate Plaza Drive, Suite 133 Newport Beach, CA 92660Tel: (888) 456-8881, (949) 209-9192, Fax: (888) 315-3831 http://www.PeoplesAlly.org info@peoplesally.org -27-

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