Ralph Y. Liu: 12-27-08 SwapRent & Economic Stimulus Plan

A detailed comment from a reader.

Summary From a Harvard Conference Review.

A similarly radical concept (Liu), which has a wide variety of possible applications, has been developed by Liu (2006) under the umbrella of SwapRent (SM). This is presented as a method of separating out the legal and economic ownership of housing, and it formalizes the way home buyers can sell a slice of their future price appreciation (some proportion of their investment return over a certain number of years), in return for a capital sum, or an income stream sufficient to reduce the extent of their default and limit the risk of foreclosure. This product (via the mortgages that embed it) potentially allows home buyers to rent when it is economical to rent and own when it is advantageous to own (or to change the proportion of their property that they are renting or owning), without moving or giving up the title to their property. Obviously this has a variety of applications other than that of managing credit risk, but currently it is appealing as a means of handling the combination of rising interest rates and uncertain house prices that are destabilizing so many of those whose loan portfolio is mainly rolled up against their home.

End of Summary

Comment: While I agree with the author’s underlying assumption – owning when it is best to own, renting when it is best to rent, I am not certain how that information would be signaled by the market to a customer.

From an economic stimulus standpoint, I do not believe that loan modifications can bring a loan above water quickly enough (Keynesian timing issue) to be an effective stimulus.

I wish Ralph the best and we might see his financial innovation in the not-to-distant future.

I believe the best economic stimulus is a “federal tax holiday” that is equal to the amount they want to spend. There would be a significant increase in consumer spending and spending which is more efficient than having government officials pick the projects. But what a time to ‘bring home the bacon’ for politicians.

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Dear Professor Marr,

I ran into your blog site today. Based on your most recent posting on the failures of many mortgage loan modification programs to date I feel you may be interested in my research work that I have developed within the past few years. I would like to share with you a timely innovative economic policy proposal based on these research results to help solve our current global financial crisis. I would welcome your blog discussions on these ideas and seek your active feedback.

Below is a simple example of how to actually implement the SwapRent program that I had sent to the relevant current federal Administration officials as well as the new Obama Administration recently. In addition to the earlier proposals to many private sectors financial institutions in 2006, I have also been frequently communicating these worked out policy plans to the Bush Administration since July 2007. Attached also, some reference materials for your review, are a recent meeting agenda where I spoke about the SwapRent methodology at a seminar on housing finance innovations held in DC by the nonprofit think tank Milken Institute and a timely authoritative academic paper by Harvard University’s Joint Center for Housing Studies that became available earlier this year. The recommendation of the SwapRent methodology is mentioned toward the conclusion part of the article on page 36 and page 37. More info on SwapRent is available at our research web site http://www.SwapRent.com.

In addition to campaigning to the federal government, we have been communicating with many local city, county and state governments for implementing the SwapRent program within the past year in order for them to set an example for the rest of the country that without the federal assistance or using taxpayer’s money they themselves could easily solve the foreclosure crisis in their local communities and restore the local property market value. In this regard, we would also work with the local and state pubic employees and teachers retirement pension funds as the initial “economic landlords” investors to the local homeowners so that local neighbors will be helping neighbors in need to restore the local economic prosperity together.

This suggested program could be easily implemented at the state, count and city levels and be self contained to ensure local results. In addition to provide help to homeowners, this wealth and welfare creation program could also help boost the local government’s finances and fix the budget shortfall related problems if the local government administer the program on its own. Otherwise this new source of revenue will simply go to the private sector banks and the finance woes of the state governments may continue and eventually they have to be bailed out by the tax payers again.

For example, the fees for the homeowners could be as high as $16,000 if the do a refinance based on the ineffective federal H4H program. More than three quarters of that will go to the banks. If the homeowners do a SwapRent transaction it will be only around $2,000 to 3,000 for the first year with a lot of savings for homeowners. This new revenue could be used to pay for the operating expenses if the local governments operate on a not-for-profit basis or they could use part of the revenue for helping the state government’s own finances without having to resort to taxpayer’s money to solve their budget problems. Again, the business model for the local governments is on slide #9 or the attached SwapRent presentation file. Please feel free to let me know if you would like to have any further detailed analysis on that which we have done for some state governments.

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Date: Wed, 22 Oct 2008 11:17:47 -0700
To: Treasury Secretary Paulson, Chairman Bernanke and other Administration Officials
From: Ralph Liu
Subject: A Home Purchase Incentive and Self-funded Economic Stimulus Plan

Dear Treasury Secretary Paulson, Chairman Bernanke and other Administration Officials,

To follow up on this subject I would like to provide you with a simple example on how this SwapRent based solution policy proposal could be implemented. To stem foreclosures and keep people in their homes in a socialist mind set is not enough, we need to have a free market based stimulus plan to get people to come back to the real estate market to ensure on-going prosperity. Our country’s and hence the global economic prosperity hinges on the continuing consumption power of the American citizens. Nothing is more effective than to shore up the home value for every American to fix this global economic problem. As Congress starts debating on how much more give-away of taxpayer’s money in a second stimulus plan, this carries a timely significance.

To borrow the 100% free market based SwapRent based solutions and concepts as a temporary wealth and welfare creation policy proposal is very simple. Few people currently would expect the US real estate market is going to recover in the next few years. It would be an easy decision for many homeowners and many would-be new property investors to voluntarily agree to temporarily give up a part (say 25%, 50% or 75%) of the future appreciation potential for the next 2 to 5 years and share it with the federal or local state governments in order to receive a “monthly income” from the government for the next 2 to 5 years. The monthly income to be received, portion of shared appreciation to give up and for how long will be determined through a transparent freely traded market for all participants. The transactions could also be designed to be “reversible” with certain lock-up periods and the homeowners can buy back the remaining maturity of the contract any time when they have the economic ability in the near future if their income situation changes.

The “incentive” resides in the generous pricing of these SwapRent contracts and should be open to all property owners and not restricted to defaulting homeowners only. All the other mistaken bailout concepts that call for granting preferential treatment to defaulting homeowners will only unavoidably foster moral hazard which will encourage and turn many more responsible citizens into voluntary willful defaults and cause more troubles for our economy. Just think of what you would do with your own home if a “bailout program” offers you the opportunity for a 20% write down of your mortgage amount for free. Wouldn’t that give you the incentive to join them? Our entire nation will become mortgage defaulters at the expense of the taxpayers! Any attempt in those incorrect bailout directions might even lead to a further downward spin of our economy.

Now the homeowners could use this SwapRent monthly incentive assistance fund for foreclosures avoidance, household consumption, starting a new business, buying a second home at a bargain price or any other purposes of their own choice to boost our national economy in order for our country to avoid a major recession. Money secured through this exchange of future appreciation potential will be treasured much more than an aimless free give-away from the Government that everybody else gets for no reason as well. The money obtained this way often has a real economically conducive purpose.

Government will be able to make more money back for the taxpayers along the way from selling these quantified appreciation units in the form of the SwapRent contracts in a secondary market to other free market domestic and foreign investors (and even to the very homeowners that have received assistance now in the future when their financial situations change) as more and more people start to take advantage of Government’s generosity in this incentive offer. A self-fulfilling melt-up scenario will automatically happen under the free market mechanism. This will bring back the profit driven motives that a capitalism free market normally relies on for its smooth operation.

From the homeowners’ perspective, making one half of 30% home value appreciation gain within the next 2 to 5 years will be a much better choice than losing the entire another 30% of home value decline if they do not take advantage of such an offer willingly, let alone the fact that they could pocket a handsome monthly income along the way for the next 2 to 5 years. Wouldn’t this be a good way to spend a part of the already allocated $700 billion dollars? Since all the Government needs is the reserve for the monthly subsidies it will not even take that much money to operate. In addition, the capital will be regenerated when the Government resells these SwapRent contracts to other free market investors. If the Government uses money to buy the entire distressed mortgages it would need a much larger sum and lose money for the taxpayers. On top of all that, whenever any other “bailout plan” asks homeowners to do refinance it will make MBS and derivatives investors unnecessarily lose money due to prepayments and may induce more banking credit crunch (a point that many economists have missed!) and homeowners will also incur many unnecessary transactional expenses. By the way, the current Hope Now for Homeowners plan is also asking the distressed homeowners to do refinancing and hence not good for the investors or the banks.

This SwapRent program could easily be embraced by both distressed homeowners and responsible citizens alike for its fairness and immediate effectiveness that save both homeowners and please note, all the MBS investors anywhere in the world. Most important of all, the current or future Administration who implements this plan will not have to be confronted with the question again on how to pay for all this due to the free enterprise self-funding nature.

Here below are some of my recent updated writings on this policy proposal that I had sent to many of you before. I have made some minor revisions. Your kind review and comments will be highly appreciated. Thanks again.

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A free market incentive plan to melt up vs. a socialist bailout plan to melt down

In time of financial crisis, socialism could be an easy answer to sell by the politicians, under some other occasions, an idea out of desperation or simply due to the unawareness of some free market alternatives available. The SwapRent based free market solution actually could be a very popular rescue plan alternative for the elected officials as it helps all the distressed homeowners directly to restore our national economy in a fair and equitable way, without favoring any particular interest groups. Capitalism always survives its own crises and abuses based on repeated innovations. This time around it could be no different.

A free market incentive plan, not a socialist bailout plan, can more effectively solve our financial crisis. As Wall Street and Washington have been busy fixing dams and levees fighting floods at the downstream, we should urgently switch their attention back on how to stop the snow from melting further at the upstream. If the snow melting at the mountain top could be slowed down, the dams and levees we already have at the downstream may actually not be that inadequate.

What we need now is a strong “incentive plan” for every homeowners and investors in the country to start buying properties again, not just a “bailout plan” for restricted people to prevent foreclosures only. If all homeowners, would-be property investors and even greedy speculators would take advantage of this fair game to utilize the new generous monthly income from the Government’s SwapRent based shared appreciation/shared equity plan, there would be no more foreclosures and many more new buyers of homes to immediately restore the entire property market to its prior value.

Therefore the SwapRent plan is not a “bailout” but rather an “incentive” plan to encourage people to start buying properties again. Government should not be a policeman trying to stop speculators to take advantage of this newly created “housing affordability” to buy second, third or even fourth homes as long as they would agree to share the future appreciation of the property with the Government. Once we have restored the property market and our national economy back to the pre-crisis level Government could then use interest rate policy and the SwapRent market rates in each city to manage a slower growth to avoid inadvertently building up another over heating bubble at that time. Now the priority is just to get us out of this crisis through this SwapRent plan first.

American people who are legitimate owners of any properties could use this SwapRent plan to swap a portion of their future appreciation potential for secured monthly income for household consumption or any other purpose, no question asked. So that our economy will get a major consumption boost to avoid a recession or depression. There are many laid-off people who may want to take advantage of this help to start up new businesses to create jobs. Others may use it to tide their family over to find those new jobs.

If this plan could be executed properly the swift recovery of the entire property market and our national economy will almost be guaranteed since it will be a self-fulfilling prophecy under free market mechanism. The more generous the Government will be to offer these monthly income to the homeowners in return for a portion of the future appreciation of their properties, the more people will take advantage of Government’s generosity since few people would expect the property will appreciate in the near future anyway. Therefore, more participation will translate into less foreclosures, more demand for buying homes including even more speculative buying and the entire property market value will indeed end up appreciating in a major way.

Government will not only benefit handsomely from the increase in value of the $700 billion worth or mortgage securities but also will be able to sell the appreciated SwapRent contracts to other domestic and foreign investors to realize a major profit for the taxpayers along the way. The whole turn-around could be realized in one or two years time if managed well.

Through the secondary market of the SwapRent contracts, homeowners could unwind and have early termination whenever they want. Furthermore, they could establish themselves as the “economic landlord” investors (for a second home in a different city for example) as well to benefit from the real estate price run-up when they have the economic means in the future once the wealth has been recreated by the free market.

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How adding the SwapRent program to TARP could help American taxpayers and homeowners

The SwapRent program could be a very simple helpful addition to the current TARP bailout plan passed and signed on Friday, October 3rd. The government could allocate part of the fund as a reserve to offer very generous monthly subsidies for both distressed homeowners and normal citizens across the country. Every homeowner will be eligible on a voluntary participation basis. Being generous can ensure more active participation. Homeowners who receive the monthly subsidies to either avoid foreclosures or to use it for any necessary household consumption to boost our national economy will in turn agree to give up part of the future shared appreciation with the Government (a similar feature to what is already in the current ineffective Housing Bill which came into effect on October 1st). Therefore this plan will also eliminate the need to have another separate fiscal stimulus bill to boost the economy.

The federal government would in effect simply act as the initial “economic landlord” by providing monthly subsidies to distressed homeowners to keep those homeowners in their homes and avoid foreclosures. The vast majority of all the mortgage securities will in turn recover in value immediately in anticipation of such a plan by the government. Hence, the banking credit crunch would ease quickly. We could therefore get to be saved from putting the entire $700 billions at risk. The total up-front amount of reserve required to be allocated to provide the total aggregates of future monthly subsidies in exchange for the long term real estate recovery investments through the SwapRent transactions will be only a very small portion if it.

The SwapRent program is simply a quantitative methodology to make it all possible. Government will end up holding these SwapRent contracts temporarily as the initial seed “economic landlord” investor and they could turn around at any appropriate time, transfer and sell these SwapRent contracts to any other domestic or foreign investors in a secondary market to bring fresh new free market money into our national economy. The involvement of taxpayer’s money will be freed up much sooner. The government’s role is only a temporary middleman to offer the investor confidence required during this crisis time.

For more technical explanations, please kindly review the FAQ #11 on the http://www.SwapRent.com home page. Basically by extracting out the purified real estate exposures through SwapRent transactions and removing the incentives to default by borrowers the value of the MBS, CDOs and CDS could recover in a major way. This could potentially enable Treasury Department to make a lot of money for the taxpayers should the SwapRent program indeed be implemented in time.

If the government could clearly communicate this credible plan on how to recover the value and trading liquidity of the depressed mortgage securities, CDOs and CDS through solving the root mortgage default/foreclosure problems first, it would certainly help create the necessary investor’s and the public’s confidence and support in a bailout plan to restore the credit creation process of our banking system. Financial markets will immediately respond accordingly. If certain really sick banks need to borrow money for the short term from the Fed or to be assisted under the current TARP plan to survive they could still do so but with the systematic help on the horizon they would not face short seller pressure any more.

The homeowners get to be assisted first and foremost. The taxpayer’s money gets to be treated as a temporary equitable property equity investment which can then be easily passed on to other free market investors. The total amount of money at risk is minimized. No Wall Street executive’s compensation issues will need to be addressed since this plan does not favor any particular group. Everything is transparent and could be easily supervised and monitored. It seems to satisfy all the demanded criteria and our free enterprise capitalism system will get to remain untarnished.

The free market approach in this SwapRent program means anyone who needs assistance or optionally elects to receive monthly income now will simply have to give up a certain part of future appreciation potential in the future with contact values determined in a transparent marketplace. The more free willing participation by homeowners and profit driven new investors, whether they really need assistance or not, the less foreclosures, the more new purchases of homes there will be and the sooner the property market will be stabilized and heading for a upside recovery. That is simply how a free market would work. The government’s seed fund will act as the catalyst to get this wealth creation process started again.

Since the $60 billion (replace it with the latest figure under discussion by Congress here) slated for the second stimulus plan is already prepared for as a give-away, homeowners in each city should be able to negotiate a much better SwapRent rate (hence a larger monthly subsidy now for a smaller shared appreciation in the future). It’ll be much better than throwing this $60 billion away without asking anything back for the taxpayers. So this could be a very popular and wholesome plan for the nation and it will fix all the fundamental and derivative problems for our economy.

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Ralph Y. Liu
Chairman & CEO
Advanced e-Financial Technologies, Inc. (AeFT)
420 McKinley Street
Suite 111-500
Corona, CA 92879
Tel: 1-888-456-8881 (from overseas1-562-309-8522) ext. 888
ralph.liu@SwapRent.com
http://www.SwapRent.com
http://www.REIDeX.com
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Provided by Ralph 1) Harvard University Housing Conference Survey Paper 2) Agenda of the Milken Institute and 3) Presentation on SwapRent (TM).

Subject Matter Experts in the field of Real Estate

Editorial Board of the FEN Real Estate: Michael Jensen, Dennis Capozza, William Goetzmann, Jan Brueckner, James Kau, Isaac Megbolugbe, Henry Pollakowski, Chester Spatt, Susan Wachter, Ko Wang, William Wheaton,

Editorial Board of the Journal of Real Estate Finance and Economics: Steven R. Grenadier, James B. Kau, C.F. Sirmans, B.W. Ambrose, P.K. Asabere, J.K. Brueckner, R.J. Buttimer Jr., D.R. Capozza, K.W. Chau, P. Chinloy, J.M. Clapp, P.F. Colwell, C. Dehring, Y. Deng, P.M.A. Eichholtz, P. Englund, L.M. Fisher, S.A. Gabriel, D.M. Geltner, J.L. Glascock, J.E. Gyourko,J.P. Harding, M. Hoesli, A.J. Jaffe, J.R. Knight, D.C. Ling, B.D. MacGregor, R. W. Martin, T.J. Miceli, W.J. Muller, H.J. Munneke, S. Ong, R.K. Pace, K. Patel, A. Pavlov, J.M. Quigley, T.J. Riddiough, M. Rodriguez, S.S. Rosenthal, P. Rubin, J. Sa-Aadu, A.B. Sanders, M. Seko, R.J. Shiller, J.D. Shilling,G. S. Sirmans, V.C. Slawson, T.M. Springer, R. Stanton, T.G. Thibodeau, S. Titman, W.N. Torous, G.K. Turnbull, K.D. Vandell, W.C. Wheaton, A. Yavas, A.M.J. Yezer, P.M. Zorn,

Editorial Board of Real Estate Economics: Crocker Liu, N. Edward Coulson, Walter Torous, Brent W. Ambrose, Paul Anglin, David T. Brown, Jan K. Brueckner, Richard Buttimer, Charles Capone, Jr., Dennis R. Capozza, Bradford Case, Peter Chinloy, John M. Clapp, Jim Clayton, Yongheng Deng, David H. Downs, Piet Eichholtz, Robert Engle, Yuming Fu, Michael Giliberto, Edward Glaeser, William N. Goetzmann, Allen C. Goodman, Jay Hartzell, Donald R. Haurin, Patric H. Hendershott, Andrea J. Heuson, Jarl Kallberg, John R. Knight, Michael LaCour-Little, David C. Ling, Chris Mayer, Daniel P. McMillen, Edwin S. Mills, Steven H. Ott, John M. Quigley, Timothy J. Riddiough, Stuart Rosenthal, Anthony Sanders, Robert Shiller, James D. Shilling, Todd Sinai, Tsur Somerville, Chester Spatt, Thomas Thibodeau, Sheridan Titman, Geoffrey K. Turnbull, Kerry D. Vandell, William Wheaton, Joseph Williams, Abdullah Yavas, Anthony Yezer,