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Date: Fri, 07 Aug 2009 10:59:06 -0700To: Director of FHFAFrom: Ralph Liu <ralph.liu@swaprent.com>Subject: A new type of housing finance products without foreclosure possibility - FARMCc: Treasury Secretary, Director of Comptroller of Currency, Director of OTS, Directorof FDIC, HUD Secretary, CEO of FreddieMac, CEO of FannieMae, Director of CSBSAttachment:http://www.swaprent.com/files/SwapRent_ANewAlternative_V6.pdf Dear Mr. Lockhart,I would like to give you and your colleagues a quick update on the progress of our recentefforts to launch the SwapRent transaction services for homeowners in different parts of the world. I hope you and your colleagues still remember the details of SwapRent andHELM from many of my previous correspondences to the relevant Administrationofficials since mid-2007 as well as visits and meetings with senior staff members fromthe Treasury Department and the Federal Reserve Board in October 2008.The latest invention of FARM (see below) which is a perfect application of SwapRentmay be equally if not more interesting. Your comments, feedback or further research byyour staff members for a potential US implementation by the GSEs on these newdevelopments, especially on FARM, would be highly appreciated. Thanks.=================In the US we have primarily been focusing on working together with the credit unionindustry. As illustrated on slide #4 in the attached latest version of the SwapRentpresentation file, there are three ways to bring the monthly subsidies from investors tohomeowners in return for a part of the future appreciation, P2P (as described in thecurrent prototype on REIDeX.com web site), B2C (through financial intermediaries suchas credit unions, banks, mortgage lenders, etc. or local governments using FARM orHELM) and B2B (trading SwapRent contracts between financial institutions). Theinterests and participation from the credit union industry or other financial intermediariescould help create the critical mass of transaction liquidity necessary to provide the bestpricing for both homeowners and investors.Elsewhere, we have had great and exciting responses so far from banks, academics, think tanks, NGOs, central banks and governments on the new SwapRent embedded FARM(Flexible And Reversible Musharakh for Muslim consumers or Flexible And ReversibleMortgage for Westerner consumers) housing finance product in the Muslim world,primarily in a few countries in the GCC and SEA regions.In the context of the dual banking systems in many countries, please see slide #5 in theattached file on the two opposite entry points for homeowners to use either FARM orHELM to switch between economic owning vs. renting for the Muslim vs. Western

worlds. Please note that FARM could be offered to Western consumers as well. There areno inherent obstacles other than the ideological issue and the lure of easy credit in ourexisting financial systems in the Western world. From the government's perspectives,tightening the credit spigot a bit and introduce non-lending based FARM types of housing finance products to homeowners could stabilize the society without sacrificingany overall homeownership level for its citizens. While HELM seems to be able to offertimely helps to the current mess through shared appreciation, as a new alternative, FARMseems to be much better suited to build a stronger foundation of a new housing financesystem going forward.Here below are more explanations of HELM and FARM.==================SwapRent embedded HELM vs. conventional SAM (Shared Appreciation Mortgage) orSEM (Shared Equity Mortgage)Here below are two links regarding the recent news that credit unions in the US are nowlegally authorized to offer shared appreciation mortgage loan modifications to its memberhomeowners. As you know that the SwapRent methodology is a much more efficient andeffective way of offering shared appreciation by the homeowners than the conventionalSAM or SEM.http://www.nafcunet.org/Template.cfm?Section=News&template=/contentManagement/contentDisplay.cfm&contentID=40371 http://www.ncua.gov/Resources/RegulationsOpinionsLaws/OpinionLetters/2009/09-0426.pdf SwapRent and its embedded mortgage products provide many advantages over theexisting mortgages currently practiced around the world. A timely implementation mayhelp the homeowners hang on to their homes. The local governments could stabilize thelocal property value through preventing defaults and increasing new investment demandsthrough a new channel for property investors. It could offer portable housing affordabilityto low income homeowners at the same time.The business concepts of SwapRent and REIDeX could be a bit complicated at firstglance since they are radically new innovations. However, once people have had a chanceto spend some time to understand them they feel it is a quite natural development of ourfuture housing finance system for our free market based capitalism societies. Please beaware that there is a difference between learning about a new economic concept of sharedappreciation versus learning a detailed systemic quantitative methodology to effectivelymake those related simple economic concepts possible in reality in a more efficient way.SwapRent and REIDeX are such detailed executable step-by-step business methodologiesbeyond simply introducing a new financial concept.

There are many major deficiencies of the old ways of offering shared appreciationbenefits through the conventional SAM (Shared Appreciation Mortgage) or SEM (SharedEquity Mortgage) products. First, SAM or SEM do not offer any price transparency sincethere is no either a primary or a secondary marketplace for homeowners and investors tonegotiate what subsidy represents what percentage of shared future appreciation. Second,there is no flexibility in maturity terms, percentage of appreciation give-up terms or earlytermination possibilities. Third, the provider banks could not regenerate the capital usedto purchase the potential appreciation elements embedded in a SAM or SEM throughselling these potential appreciation elements to other free market investors through asecondary market.As a result, this simple economic concept of shared appreciation usually ended up onlybeing offered by local governments to homeowners using taxpayers money in the past.Furthermore the taxpayers money usually got stuck for 20 or 30 years (the terms of themortgage 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 needof new innovations such as SwapRent and HELM.A good recent example to understand why the conventional SAM or SEM would notwork is by looking at what shared appreciation scheme that the Federal government haddone in its H4H homeowners bailout program implemented in October 2008. The onerecipe formula in its program contains all the problems and short-comings describedabove. To solve these problems, our financial markets need new innovations. It may notmake sense for credit unions or any other financial institutions to spend resources now onthe shared appreciation concept only to repeat the previous mistakes if the methodologyis not improved.The key thing to make it successful is to design a new financial contract to extract out theshared appreciation component and detach it from a conventional shared appreciationmortgage product so that market participants can quantify it and give a fair value marketprice in a freely negotiated and traded secondary market. SwapRent is the new financialcontract created specifically for this purpose and REIDeX is the secondary market tofacilitate the price discovery and the capital regeneration functions for the benefits of thehomeowners and investors. The combined new economic owning and renting concepts isthe conceptual foundation of how to use the SwapRent transaction and apply these newhousing finance methodologies.=============A simple example of a new type of housing finance products based on SwapRentcontracts - A new type of housing finance products without foreclosure possibility -FARMA home seeking person could start out as a regular renter for a residential property in alocation of his choice. The bank will purchase the property into a trust or simply in a co-ownership legal structure for him. In the trust, the person could buy into a portion of thelegal ownership between 0% to 100%. Either 5%, 10% or 20% could be a good starting