FAQ #21: Why would investors feel more comfortable dealing with the city or county governments instead of dealing with homeowners directly? What economic value does the municipality perform? &
Please click here for a presentation file for city and county governments.
The hands-off approach by both the federal and the local governments in the past to allow the unregulated and unscrupulous private sector financial institutions to come in to their local communities, make a mess, take the profit and leave had contributed to our mortgage mess in many cities and counties. The property value and utility taxes are the lifeline that the city and county finances rely on. It is left for the city and county governments to urgently fix these problems now before the problems deteriorate further.
The government’s role in a capitalism society is usually to create rules and promote economic prosperity based on those rules. Free market means that playing the fair game within those rules then the prosperity will come. That is exactly what we are asking the municipalities to do now, so that the free market investors will come in, out of their own will, to rescue the local city and county economy if they think that these city and county governments are willing to make the proactive efforts to restore the local economic prosperity and to invite new investment capital into the local communities. To implement the SwapRent (SM) project, all they need to do is to make the efforts to prevent potential foul play by the homeowners. In another word, the investors should be made comfortable through the participation of the local governments that they will be able to secure the potential return in the future that they deserve by taking the risks now. Or else, this free market capital will simply go somewhere else where they feel more comfortable.
In investment terms, the institutional investors would be interested in adding the residential real estate market risk exposure in their long term investment portfolio to further diversify the portfolio risks. That is the key difference between professional institutional investors and individual speculators – they don’t simply bet on whether a particular asset class will or will not go up. All they want is to have a prudent asset allocation for the long term since no one will be able to predict the performance outcome of any particular asset class in the future.
However a conventional mortgage financial product may not be the right candidate to add this residential real estate market exposure since investment in a traditional residential mortgage will expose the investors to interest rate risk, prepayment risk and borrower credit risk, in addition to the real estate market or property value risk. The Generic, AG and DP SwapRent (SM) contracts allow the investors to expose themselves only to the real estate market risk and are therefore much more useful in their investment decision making and portfolio construction process.
When the city and county governments continue to deal with the homeowners using a shared appreciation mortgage product such as HELM, and then transfer the extracted real estate market risk in the form of a SwapRent (SM) contract to the investors, it will help shield the investors from the potential homeowner credit risks. This is a major free market economic function that the municipality could easily provide.
The most encouraging thing is that most of the municipalities have already been offering these conventional shared appreciation mortgage products to their local homeowners in the past. There is nothing new that needs to be introduced in terms of the political framework. Even the recently passed Housing Bill will let the US federal government be the lien holder to collect the potential shared appreciation from the homeowners. If the homeowners don’t deliver the agreed upon shared appreciated value, Uncle Sam will foreclose their properties then in order to enforce this simple fair and equitable economic concept. Nobody should cry for these ingrate homeowners because they would be frauds if they did not honor the agreement to share the profits they have earned in the future in exchange for receiving assistance today.
SwapRent (SM) and HELM are only the improved business methods over the conventional shared appreciation mortgages that will allow the property lien holders to quantify, extract out the real estate market risk and pass them on to other investors in order to create a secondary trading market and hence the associated economic benefits for all the market participants.
Further down the road as the familiarity with the new "economic renting" concept and the SwapRent (SM) related methodologies evolves, the smarter and more financially sophisticated local municipal governments could also offer the AG SwapRent (SM) contracts directly to the individual investors around the world to create virtually economic landlord citizens for their cities and counties and get actual money piped into their local communities at the same time for economic growth. Furthermore, the local governments could also offer DP SwapRent (SM) to their own local homeowners to derive income to better manage their own municipal finances. This new municipal housing finance system will be the free market capitalism practiced at its best. Hopefully this may happen soon as the result of the impetus to learn and adopt new things due to the current economic crisis.
Again, the important thing for those new-idea-phobics to remember is that, like it or not, the use of the simple concept of shared appreciation as the viable way to get our country out of the current severe economic problems is here to stay — even the recently signed Housing Bill is letting the US federal government be the lien holder to collect the shared appreciation from the homeowners they have provided assistance to in the future. This new way to offer true housing affordability going forward in the US, when successfully implemented, will certainly prevent the subprime fiasco from repeating itself again. SwapRent (SM), together with HELM is only the improved free market version of those older conventional shared appreciation products so that the assistance money does not have to come from the taxpayers. These new innovative solutions are here for the smart and diligent municipalities to take advantage of in order to save their own local government finances, their local economies as well as the social and economic well being of their local citizens.