06/25/2009 Shared appreciation mortgage loan modifications by Federal Credit Unions

In light of the recent news that federal credit unions are now legally authorized to offer shared appreciation mortgage loan modifications to its member homeowners, an exciting new chapter of hope for American homeowners has been turned to.

Although the economic owning or renting concept as facilitated by the SwapRent contract and its embedded mortgage product HELM is the most efficient and effective methodology to utilize shared appreciation by the American homeowners to avoid defaults and prevent foreclosures, our earlier attempts since late 2006 and most of 2007 to assist major commercial banks, mortgage lenders and Wall Street firms have not been a successful one. By the time these sexy banks finally realized the merits and values of the SwapRent methodology it was already too late. Many of them were either on their death beds or had no credibility to launch any new business anymore. Try to imagine if a over-paid mortgage broker from Countrywide knocks on your door now and tries to help you with your mortgage payment problems with a new kind of mortgage innovation? Equally, imagine if a hot shot bond trader from Lehman Brothers tries to peddle some new innovation to hedge the mortgage portfolios among the newly cooked up MBS and CDOs that he recommends too to small pension funds in Norway or some major banks in Iceland? … Understandably none of these once high flyers would make a good partner to help us introduce SwapRent to the world. With that kind of negative image of those banks, we would have simply been viewed guilty of self-serving by association if we work with these disreputable Wall Street firms in the current environment. That would have instantly ruined my dedicated life-time research work on new housing finance for the good cause. So, we turned down a few requests to work together.

Our later tedious hard work of meeting after meeting in early and mid 2008 to help municipalities, city, county and state governments across the nation to offer the SwapRent program as a fully self-funded not-for-profit operation to save their local citizens/homeowners as well as the dire straits of their own government finances did not go far either. It was much too easier for them to simply have a handout to the federal government for more taxpayers’ money as a bailout. A few of them are intelligent enough to see the value of SwapRent but politically they don’t have a backbone to stand up straight to take any initiatives. Asking for federal handouts had worked well for them to survive so far but it seems time is running out for them again at the moment.

As far as all those efforts in late 2008 invested in educating and dealing with the federal administration officials and Congressional staff members, the best responses we got back were solicitations for political donations and invitations to help them get re-elected as though we could be another cash cow for them! Those who say capitalism is at its best in America seem to have a point.

So a new chapter indeed now that the credit unions could finally have the chance to step up to the plate to help American homeowners.

As explained in many previous blog postings that a timely implementation of SwapRent and HELM may help the homeowners hang on to their homes. The local governments could stabilize the local property value through preventing defaults and increasing new investment demands through a new channel for property investors. It could offer portable housing affordability to low income homeowners at the same time. The P2P (Peer to Peer) business model prototype site that we had built for the US market is at http://www.REIDeX.com . The B2C (Business to Consumer) and B2B (Business to Business) business models are also operated by REIDeX, Inc. These institutional businesses are done using traditional means without an on-line web automation process.

The business concepts of SwapRent and REIDeX could be a bit complicated at first glance since they are radically new innovations. However, once people have had a chance to spend some time to understand them they feel it is a quite natural development of our future housing finance system for our free market based capitalism societies. There is a difference between learning about a new economic concept of shared appreciation versus learning a detailed systemic quantitative methodology to effectively make those related simple economic concepts possible in reality in a more efficient way. SwapRent and REIDeX are such detailed executable step-by-step business methodologies beyond simply introducing a new financial concept.

By being a middleman in the SwapRent offering credit unions could develop a new kind of business activities or a new kind of fully self funded not-for-profit operations for the benefits of their members. The business model is again fully explained on slide #11 in the SwapRent presentation slides.

As also explained at the SwapRent.com home page, there are many major deficiencies of the old ways of offering shared appreciation benefits through the conventional SAM (Shared Appreciation Mortgage) or SEM (Shared Equity Mortgage) products. First, SAM or SEM do not offer any price transparency since there is no either a primary or a secondary marketplace for homeowners and investors to negotiate what subsidy represents what percentage of shared future appreciation. Second, there is no flexibility in maturity terms, percentage of appreciation give-up terms or early termination possibilities. Third, the provider banks could not regenerate the capital of used to purchase the potential appreciation elements embedded in a SAM or SEM through selling these potential appreciation elements to other free market investors through a secondary market.

As a result, this simple economic concept of shared appreciation usually ended up only being offered by local governments to homeowners using taxpayer’s money in the past. Furthermore the taxpayers’ money usually got stuck for 20 or 30 years (the terms of the mortgage itself) in the way as they have been practiced so far in many other countries. There are numerous other problems with the conventional SAM or SEM, hence the need of new innovations such as SwapRent and HELM.

A good recent example to understand why the conventional SAM or SEM would not work is by looking at what shared appreciation scheme that the Federal government had done in its H4H homeowners bailout program launched in October 2008. The one recipe formula in its program contains all the problems and short-comings described above. To solve these problems, our financial markets need new innovations. It may not make sense for credit unions to spend resources now on the shared appreciation concept only to repeat the Federal government’s mistakes if the methodology is not improved.

The key thing to make it successful is to design a new financial contract to extract out the shared appreciation component and detach it from a conventional shared appreciation mortgage product so that market participants can quantify it and give a fair value market price in a freely negotiated and traded secondary market. SwapRent is the new financial contract created specifically for this purpose and REIDeX is the secondary market to facilitate the price discovery, risk transference and the capital regeneration functions for the benefits of the homeowners and investors. The combined new economic owning and renting concepts is the conceptual foundation of how to use the SwapRent transaction and apply these new housing finance methodologies.

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