FAQ #20: (added on June 10th, 2008) Why would city and county governments be involved since this seems to be a private sector enterprise? What are the various roles could the local municipality potentially play in order to provide the economic and social benefits to its citizens?
Please click here for a presentation file for city and county governments.Basically the objective of the SwapRent (SM) Project for the municipalities is to set up a new way to channel fresh new money from major institutional investors such as the state pension funds and insurance companies etc. in the beginning (and even both domestic and foreign individual investors could also be possible in the future) to their local city and county communities to assist their city or county homeowners, either to help prevent foreclosures, or when it is proven that the existing homeowners are not worth helping (due to fraudulent behavior or permanent loss of economic means to own), to assist other more responsible citizens to buy those already empty homes in their local neighborhoods. The bottom-line is again, there will be eventually fewer and fewer empty homes left in the local communities due to this new housing affordability offered by the SwapRent (SM) contracts. More new long term residents will also be attracted to relocate here due to this newly created housing affordability which will further bid up the local property value. A simple realization of free market mechanism.
In addition, the SwapRent (SM) Project will provide the hedging function as one of the side benefits for rich homeowners who may not even have a mortgage on their homes, as explained above. For more info on other side benefits please review the introductory text above. The net economic effect is that the property value will have more upside than downside growth trend due to the demand driven by these economic benefits offered to property owners.
The project is an optional participation by the city and county citizens and the city and county government will not have to rely on any tax payer’s money or federal and state grants to accomplish these economic objectives.
The initiative is in fact a political opportunity for those visionary city and county officials who are willing to make the extra efforts to assist the homeowners in their cities as well as to improve their local economy and hence their own city and county finances. Due to the apparent fact that there is no concrete help on the horizon that may come from the Federal government to stem the mortgages defaults and foreclosures the local governments may need to take their own destiny in their own hands to assist the homeowners, stabilize the declining local property value and rescue their own city and county government finances.
There are many ways a city or county government could participate in the SwapRent (SM) Project.
1.) At the minimum, it could act as a game keeper to make sure homeowners and investors understand what they are doing, bring them together and make sure they will each deliver what they have promised in a SwapRent (SM) contract to make sure that the entire process will be very transparent, honest with no room for foul play.
2.) To participate more actively, the city or county could act as the middleman in an outright SwapRent (SM) transaction with a contingent second lien on the homeowners property to make sure they will deliver on one hand when the property value rises, and an offsetting SwapRent (SM) transaction with the institutional investors on the other. To hold a lien on homeowners’ properties is nothing new for many of the municipalities which are already doing it. Many of them normally provide zero or low interest loans to low income families or first time home buyers and hold second lien against their properties. Sometimes they also share a small portion of the property value appreciation with these homeowners. All these practices have already been in place for quite some time. The SwapRent (SM) methodology simply extends those simple concepts and act as a superior improvement by providing the ability to create a transparent secondary market, among other advantages. Since the SwapRent (SM) project does not use any taxpayers’ money or state/federal grants, it has no restrictions on who can receive these benefits.
3.) The city or county could also engage a participating local community bank to issue the SwapRent (SM) embedded mortgage HELM to homeowners but the creativeness/innovation credit and publicity may go to the bank instead upon a successful launch. In addition, many banks have severe credit crunch problems on their own these days. It may be unnecessarily risky to get the banks involved as middlemen since there is no need to incur additional problems which may be created when many of the banks collapse in the near future. When the banks collapse they will simply vanish. Municipalities may not want to their local economies be dragged down further by the potential bank collapses. The mortgage mess they had created with the Wall Street firms within the last few years is hurting enough already. It is our explicit intention to keep the SwapRent (SM)project as a Main Street solution, rather than being incorrectly viewed as another Wall Street gimmick as the financial institutions really do not have the credibility to launch anything new to solve this crisis at this stage.
4.) For more political visibility and the best overall effects, the city or county could also set up a non-profit agency (booking-wise, no need to hire additional people to run it) to issue HELM directly to homeowners and lay off the real estate exposures to other institutional investors through the offsetting SwapRent (SM) contracts.
None of these four arrangements will require any capital on the city or county government’s part to run the on-going operations. It could also easily be structured as a 100% self-funded, not-for-profit operation by the city or county governments without even the need of funding for operational expenses by levying a small fee on the SwapRent (SM) transactions performed by the investors and homeowners in order to support these non-profit operations. Again this SwapRent (SM) Project is simply to help the city and county governments build a new channel to bring fresh money from proper institutional investors to their local homeowners, similar to its normal role to promote economic development and prosperity on the business side.
The more the local governments participate in the process the more the investors will feel comfortable and be willingly to pump money into their local communities. This is simply based on the true spirit of how a genuine free market would normally operate. These are all part of the operational issues we will explore together with the internal project team during the consultancy period in order to come up with the most appropriate mode operandi for each city and county.