Why You Should Trust HOME
December 12th, 2022

The short answer is you shouldn’t, especially given all that has happened in crypto and the rest of the finance world. Our goal is to build smart contracts and systems that you can verify so HOME earns your trust. Some of the work is finished. Other parts are in-process and we will try to point those out when they arise.

Here are some examples of ways you can verify yourself:

How does the Protocol get paid back?

The ownership of the liens that back HOME are listed both on chain and at the county where the house is located. The protocol uses a particular type of lien called a “real estate lien” or a “home lien”. The lien system has been around for hundreds of years and has been tried in court thousands of times and remained intact. For each lien placed on a house by an originator (someone who creates loans), they record the lien at the county. The lien is held “for the benefit of the loan owner.” A servicer is licensed and regulated to collect payments and enforce the lien, i.e. foreclose on the house to repay the lien if payments aren’t made.

In the HOME Protocol’s case, the servicer handles the lien for the benefit of the protocol. LoanSnap Inc. is licensed and regulated by both state and federal laws to collect payments and enforce the liens that the HOME protocol has rights to. LoanSnap, Inc is obligated by contract to do what the HOME DAO directs with respect to the liens. In the future, this company will change to an independent entity fully controlled by the DAO.

For every lien backing HOME you may go to the site www.homecoin.finance and view the address, the lien amount and, soon, a link to the county record, if its online. If the county doesn’t have a website yet, you may contact the county and they will provide documentation attesting to the lien. You will also find a link to the blockchain record and, finally, a link to all the liens backing HOME on opensea. We are working with several third party groups to verify and provide this information on chain.

What loans are used to back HOME?

In mortgage there are many types of loans from those that are considered “safe” and often called qualified mortgages to those that are considered “risky” often called non-qualified mortgages. In addition, these loans are conforming meaning they can be sold to Fannie Mae, Freddie Mac and other institutions affiliated with the US Government. A discussion of mortgages types is beyond the scope of this document but the protocol has a smart contract that only allows mortgages that are qualified mortgages i.e. they are approved to be sold to Fannie Mae or Freddie Mac. The US Federal government is the largest buyer of qualified mortgages. They hold approximately $3 Trillion of qualified mortgages in the U.S. Federal reserves. Below is a summary of full guidelines for those mortgages.

Fannie Mae Qualified Mortgage Requirements
Fannie Mae Qualified Mortgage Requirements

The protocol does allow some loans that don’t meet the qualified mortgage requirements in one way. SMARTLOCs are underwritten to qualified mortgages guidelines, except they can be second liens. Here are the requirements for those mortgages as currently enforced by the protocol.

HOME Loan Requirements
HOME Loan Requirements

In summary, the only types of mortgages allowed in the pool of mortgages backing HOME are underwritten to Fannie Mae qualified mortgage guidelines except for SMARTLOCs where the only difference is the lien type. In addition, SMARTLOCs are only allowed into the pool if both the 1st and 2nd lien can be combined and underwritten to qualified mortgage guidelines and sold to Fannie Mae or Freddie Mac in the future.

Worst Case Scenario

The protocol is often asked what would happen in a “worst case scenario.” The first scenario is when a borrower stops repaying one of the loans. In this case, the servicer uses their power as the lien holder to foreclose on the house, sell the house and repay the money to the HOME Protocol. A more dire scenario is a global financial crisis. However, first we have to consider how HOME differs from other stablecoins. Most stablecoins today require 100% liquidity meaning their promise is you can always redeem 1 coin for 1 dollar (or some fiat). A classic example is USDC. That is why USDC keeps the assets backing the coin in cash or short term treasuries. HOME is different because it allows HOME holders to lockup their money for longer periods of time and earn a higher return. This means holders of the coin cannot redeem them until the lockup expires. Here is a graph of the total amount of HOME and how much is locked up and can’t be redeemed today. This means the total that could be redeemed is just under half of the total value locked.

Boosted HOME Amounts
Boosted HOME Amounts

This greatly reduces the burden of a worst case scenario since a large amount (today 40%) of HOME is unredeemable for a year. This results in the protocol only having to liquidate a small portion of the loans backing it to support redemptions vs other stablecoins who could (and have had) redemptions of up to 100% of the assets backing the coin.

When a worst-case scenario comes up people often highlight 2008. For context in 2008, which many believe to be the worst crisis in the history of mortgage, several things happened. While it was a terrible event for many homeowners, when you look at the data only 10% of loans went into default, i.e. people stopped paying. This was across all mortgage types including many types that are now forbidden by law.

Mortgage regulation and licensing were completely revamped to eliminate the types of loans and behaviors that many felt led to the crisis in the first place. This is known as the Dodd-Frank Act. This act transformed the regulation for banks and mortgage lenders which are now much more strict and require considerably more checks and balances. However, as we have all found bad things can still happen. In a liquidation scenario, i.e. the DAO has determined all HOME holders who are not locked up must be repaid, the protocol would sell mortgages in the pool (potentially all of them) to satisfy this obligation. Since they are qualified mortgages they could be purchased by Fannie Mae, Freddie Mac or any one of a number of mortgage buyers in the $13 Trillion industry. Since they are considered “safe” these mortgages are generally in high demand.

While we have done a lot of work to ensure you can verify what we say, there are areas where the protocol needs to improve. In particular, the DAO needs an entity that it fully controls vs controlling the actions of a person controlling the entity. This is underway. While many counties are online, today some are not, this makes verification of liens difficult as you would need to contact each individual county. We are working with counties and data providers who will aggregate and verify this data on chain in the future. We hope you join us in our quest to bring a transparent, decentralized and durable return stablecoin to the world.

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