One of the key concepts to understand how the SwapRent program could add more value is that in addition to being used alone, the SwapRent program could also be used to complement by providing additional value in conjunction with instead of being used to replace the many loan modification programs already in place, whether the existing programs are provided by the federal government or by the private sector investors themselves.
Just try to imagine what would happen to those credit worthy responsible homeowners who have already agreed to a recently worked out lower monthly mortgage payments plan through other government programs, to receive another additional $500, $800, or $2000 monthly cash flow by agreeing to give up a certain percentage of the future appreciation potential to other free market based investors for the next 2, 3, 5 or 10 years through the SwapRent contacts. Wouldn’t the re-default possibility for these homeowners be even less?
Furthermore, to repeat another SwapRent program deployment strategy mentioned many times in the blog before, try to imagine what net effect there could be for a local town or city in the US if a few major institutional investors or local governments start offering the free market based SwapRent program to every property owner as a free market choice for them to share a part of the future appreciation with other investors, perhaps for the next 2, 3, 5, 8 or 10 years. Since the real estate market is quite regionalized and the supply and demand is compartmentalized by nature, if every homeowner or speculative property owner in this town or city takes advantage of this timely opportunity to monetize future appreciation potential into receiving generous current monthly cash flows, there would be not only zero default or foreclosure in this neighborhood, but also the free market demand created by many property speculators using the monthly subsidy provided by the same SwapRent program to buy a second or third home would be able to bid up the property value again in this town or city.
It is easy to see that the net effect is that local economic prosperity will be brought back to this neighborhood because of reduced foreclosures and increased home value. However, this time around, the value creation would not be a repeat of the previous leverage-induced property market bubble since most of the new owners of homes and investment properties will be those who could truly afford to own without using inappropriate borrowing. This phenomenon could only be realized if this simple economic shared appreciation or shared equity concept were effectively and efficiently implemented through new methodology such as the SwapRent program.
Few people in this neighborhood would be expecting the property market recovery is going to happen within the next 5 years anyway so there could be many people who would willingly sign up for the SwapRent program in order to receive current additional monthly cash flows. The property market doldrums would be true if no innovative programs such as SwapRent is implemented. So everybody could indeed end up in poor house with rampant unemployment five years later if no such action is taken in the local community.
On the other hand, if the SwapRent program is made available to every property owner in this local community, the additional monthly income of $500, $800 or $2,000 per homeowner could stretch far in terms of creating more new economic stimulus activities in this local community without using any taxpayer’s money. The more generous the initial program is designed to be, the more people would sign on to adopt the SwapRent program, the less there will be reasons for foreclosures and as the property value is being bid up again by many free market participants the more likely there will be any future property value appreciation to share at all. This wealth creation story could almost be self-fulfilling.
In the end, everybody, the homeowner, the investor, the local government and every resident, even the by-stander, in this local community would be happier and would be able to share the increased wealth through the increased local property value that is to be created by the SwapRent program. Most importantly, the original investors who took the risks to put up the monthly cash flow subsidy to the homeowners could get to recoup their investments with a very handsome return through the future property value appreciation captured in the SwapRent contracts, in addition to the short term trading profits on mortgages, MBS and other structured products they may have already earned. They would have done very well while doing good to the society at the same time. Isn’t this really how our free market capitalism is supposed to operate?