So FARJHO is great. What is in it for the banks and the politicians?
Further to my 0227 2011 blog post below on the key features of FARJHO, one of most important new innovative concepts for real estate property investing going forward is to do away with the concept of using the property as the collateral for borrowing when it comes to “home ownership”. This way, foreclosure will no longer be a possibility, ever!
People may choose to continue to use the property as the collateral for all other types of real estate investments but when it comes to owning homes, it should be avoided at all cost for the homeowner’s, joint property investors’ and the entire society’s greater good.
For most commercial real estate investors who often use the same LLC structure to co-own some office buildings, hotels, industrial warehouses or retail shopping complexes, it is usually an intentional goal to use the LLC structure to shield the liability of mortgage loans for each of the LLC’s members so that they could borrow as much as they could to achieve the highest leveraged returns. That is indeed the way the property investors have tried to outsmart the banks so that they could walk away when the property market collapse and let the lenders hold the bags of under water depreciated properties. This has been a main pit fault in our current banking system since it always creates financial crises and the taxpayers would always eventually have to bail them out upon the maneuvering by the bankers and the crony politicians, most often or not, under the ridiculous excuse of being “too big to fail”.
Why can’t the lenders smarten up to lend to each individual LLC members and use their LLC member interests as the collaterals, the same way banks lend to stock market investors by using their common share securities in the listed companies as collaterals?
As mentioned before, in the main design of the basic FARJHO structures the aspiring home owners (AHO) and the joint property investors (JPI) usually use all cash to purchase the homes. How they individually have obtained the cash is not necessarily an issue as long as they are the legitimate owners of the cash, i.e. whether they have borrowed or not to end up with the necessary cash is not an issue on individual basis.
Therefore for the LLC version of the FARJHO structure to be introduced in the US, since we could not do away with the borrowing concept all together due to the borrowing culture deeply embedded in many property investors’ minds in their desire to use leverage as much as possible to achieve higher returns if and when the outcome is good. As a result, the borrowing/lending provision has been created for the US version of FARJHO but recommended to be conducted only at the LLC member level, i.e. only at the shareholder level if the home is to become the one property corporation co-owned by the aspiring home owners and other joint property investors.
It would indeed be a pioneering innovative effort for the proactive banks, credit unions or any other mortgage lenders to consider to start lending to the FARJHO LLC members using their individual member interests in the FARJHO LLC as the collaterals.
As explained before, if and when any of the LLC members ever loses his/her monthly income capability, he/she could either sell their member interests to other free market based investors or let it be foreclosed by the lenders individually. Therefore either a new free market based investor or the lending bank would replace the defaulting co-owner and become the new co-owner with the current home occupier/co-owner (AHO) and all other joint property co-owners (JPIs).
Again, this is exactly the way how the new FARJHO structure could introduce and ensure a new safety piece of mind in home ownership, neighborhood stability and social harmony to the society with no more deserted, un-cared for foreclosed homes scattered around the local communities. We have been speaking with many banks, credit unions and lenders within the past few years but the real innovative bank hero has yet to stand up to make it happen in order to claim the credit.
Congress could certainly get their act together to pass a law to request all home lending to be conducted under this FARJHO concept through a transitional implementation period. Therefore it seems there could be many political credits to be claimed for if any politicians who could champion these new ideas and make the necessary effort to make it happen.
In addition, there could be another great opportunity for any aspiring statesman to champion to waive the annual LLC franchise fee for low income working families so that it would be possible for them to use the LLC structure to corporatize their homes under the FARJHO concept and method.
Using the $800 annual franchise fee required in the state of California as an example, it may not be a major cost factor percentage-wise for $2 or $3 million coastal mansions in Orange County but it would easily become a heavy burden for the partial homeowners in a $100,000 or $200,000 homes in the Inland Empire area in Southern California.
Let’s hope some smart budding politicians could indeed take advantage of all these new opportunities to change the home lending practices by the banks and campaign for the waiving of the annual LLC franchise fees for local residents in many states during the next election. We will vote for them!