Home Ownership Opportunity Pathways™ (HOOPs™)
The Home Ownership Opportunity Pathways™ (HOOPs™) which UREWPS™ has on its Strategic Roadmap will rely heavily on smart contracts. It will also be offered exclusively through a non-profit corporation. This will keep regulatory compliance burdens at arm’s length from UREWPS™ and avoid converting UREWPS™ into a consumer lender.
UREWPS™ will sell housing units to the non-profit on a contract for deed. The non-profit, in its turn will wrap that foundational contract inside a second contract for deed and sell it to an owner-occupant.
Because the intent of the non-profit is to promote homeownership, the contract will require owner-occupancy. Units may not be turned out as rentals. If an owner-occupant vacates the property or otherwise defaults on their contract, they will have the following options:
- Sell the property to a third party who must pay off the contract in full to take ownership.
- Execute a quit claim with the non-profit. This is similar to a deed in lieu of foreclosure. It legally acknowledges the disavowal of all ownership claims on the unit. The tax implications of this may vary. We will tilt the table to avoid damaging the homebuyer, when possible. This quit claim will be embedded in the smart contract (the contract for deed). Executing it will not require much effort. It will also account for potential refunds if the homebuyer has paid ahead on their contract. There may be a fee involved.
- Failure to make timely, current payments will be a condition of default. If the homebuyer defaults on payments and continues to reside in the unit, the quit claim will be executed, and the homebuyer will be converted to a renter. The non-profit will immediately begin eviction proceedings.
- If the non-profit is unable to make payments on a unit, UREWPS™, at its discretion, may intervene and offer the unit to investors. Investors may be given the option of taking over the contract for deed as the owner and either retain or dispose of the property, as they desire.
Servicing Costs
The number of labor hours required each year to service a residential mortgage depends on various factors including the complexity of the mortgage servicing, the efficiency of the servicing operations, and the technological tools available to the servicing team. Here’s an outline of the tasks involved, and an estimate of the labor hours needed for mortgage servicing:
- Payment Processing: Includes handling monthly payments, ensuring they are applied correctly, and addressing any payment issues.
- Customer Service: Responding to borrower inquiries, providing account information, and handling requests for information or changes to the account.
- Escrow Management: Managing escrow accounts for property taxes and insurance, making sure payments are made on time, and adjusting escrow payments as needed.
- Delinquency Management: Tracking late payments, sending notices, working with borrowers on repayment plans, and handling foreclosure proceedings if necessary.
- Reporting and Compliance: Preparing reports for investors, regulators, and internal management, and ensuring compliance with all relevant regulations.
- Annual Statements: Preparing and sending annual mortgage interest statements to borrowers for tax purposes.
Estimated Labor Hours
A report by the Mortgage Bankers Association (MBA) can provide some insight. According to their studies, mortgage servicers might spend an average of 40 to 60 hours per loan per year on all activities related to servicing a mortgage. This includes time spent on regular monthly tasks, managing delinquent loans, and performing all regulatory and compliance-related activities.
Breaking down the hours:
- Payment Processing: 10-15 hours
- Customer Service: 5-10 hours
- Escrow Management: 5-10 hours
- Delinquency Management: 10-15 hours
- Reporting and Compliance: 5-10 hours
- Annual Statements: 5-10 hours
These estimates are based on averages and can vary significantly based on the specifics of the mortgage servicing operations, including the use of automation and other technological tools that can reduce the labor required.
For more precise data, it would be advisable to refer to specific industry reports or studies conducted by mortgage servicing companies or industry associations.
HOOPs™ Considerations
The use of smart contracts in the mortgage servicing process can significantly affect the level of effort required for each of the six areas: payment processing, customer service, escrow management, delinquency management, reporting and compliance, and annual statements. Here’s how smart contracts might impact each area:
- Payment Processing:
- Effect: Smart contracts can automate payment processing by executing payments automatically when certain conditions are met (e.g., a specific date).
- Reduced Effort: Automation reduces manual intervention, decreasing labor hours significantly. Potential reduction by 70-80%.
- Escrow Management:
- Effect: Smart contracts can manage escrow accounts by automatically adjusting payments based on changes in tax rates or insurance premiums, and ensuring timely payments.
- Reduced Effort: Automation of adjustments and payments can reduce the need for manual calculations and processing. Potential reduction by 60-70%.
- Reporting and Compliance:
- Effect: Smart contracts can ensure that all transactions are recorded on a blockchain, providing an immutable and transparent ledger for reporting and compliance purposes.
- Reduced Effort: Simplified reporting and auditing processes due to automated and transparent record-keeping. Potential reduction by 40-50%.
- Customer Service:
- Effect: Smart contracts can automate responses to common inquiries by integrating with chatbots and AI systems, providing real-time updates and transparency to borrowers.
- Reduced Effort: Reduced need for human intervention in routine inquiries and basic account management tasks. Potential reduction by 30-50%.
- Delinquency Management:
- Effect: Smart contracts can trigger notifications and execute predefined actions when payments are missed, such as sending reminders, imposing late fees, or initiating foreclosure procedures.
- Reduced Effort: Reduced manual tracking and intervention in early stages of delinquency. Potential reduction by 50-60%.
- Annual Statements:
- Effect: Smart contracts can generate and distribute annual mortgage interest statements automatically, based on the data recorded on the blockchain.
- Reduced Effort: Automated generation and distribution reduce the need for manual compilation and mailing. Potential reduction by 70-80%.
Summary of Potential Labor Hour Reductions
- Payment Processing: Reduced by 70-80%
- Customer Service: Reduced by 30-50%
- Escrow Management: Reduced by 60-70%
- Delinquency Management: Reduced by 50-60%
- Reporting and Compliance: Reduced by 40-50%
- Annual Statements: Reduced by 70-80%
If we assume a fully loaded labor rate of $100 per hour, the table below shows the impacts of these reductions.
Source: HOOPS™ Servicing Fees Model.xlsx
Servicing Implications
The overall reduction in labor hours due to the use of smart contracts could be substantial, potentially transforming mortgage servicing into a more efficient, cost-effective, and transparent process. These efficiencies can lead to lower servicing costs, improved borrower experience, and enhanced regulatory compliance.
Additional Considerations
The use of contracts for deed (AKA land contracts) and trusts may also reduce the costs of delinquency management by automating the reversion of the contract.
HOOPs™ Considerations
Offering a HOOPs™ seller financing package that must be paid in CuBit™ and carries and annual fee instead of any interest payments, the table below how it might look, assuming the fee is set to pay for the labor costs of servicing the contract, the loan has a 15-year term, and 6% is the comparable rate.
Source: HOOPs™ Servicing Fees Model.xlsx
With a traditional note, the homebuyer would have paid more than $54,444 in interest payments (this doesn’t include the principal payments). With the no interest HOOPs™ approach, the home buyer would have paid $36,000 in servicing fees. This would give the home buyer a total savings of more than $18,444.
This also assumes that the home buyer doesn’t refinance or sell the property. The average homeowner moves within 8 years of buying. The median is 13.5 years (Meyer, 2024). Selling at the 8-year mark would net the homeowner more than $20,647 in savings by paying the fees instead of interest. By the end of year 12, the annual interest payment is less than the fee. The negative savings hold for the last four years of the contract. However, the cumulative savings are still positive.
Although the annual HOOPs™ servicing fee is not trivial, compared to the interest payments on a similar note, it represents a substantial savings for a homebuyer. On a $100,000 home paid off in fifteen years, it represents more than 18% savings. For more expensive homes, the savings are greater, both in absolute and relative terms. A $300,000 transaction would see 42% of the purchase price in savings by paying the fee instead of interest. For a $500,000 home the savings represent 47% of the purchase price and amount to more than $236,220.
With median home values currently between $400k and $500k, the HOOPs™ approach may be extremely attractive to homebuyers. When you add in the fact that it is seller financing instead of bank financing, it may make the opportunity even more attractive.
Conclusions
The largest hurdle, from a sales perspective, may be that title to the property doesn’t pass until the contract is paid off. However, even that hurdle may be overcome by the opportunity to truly benefit from making future payments today.
Zero interest, payment holidays, avoidance of banks, and rapid payment of the contract are all powerful inducements which should make a HOOPs™ home very financially attractive.
One final concern for homebuyers is the fact that the monthly payment amount is fixed and is paid only in CuBit™. This means that as the value of CuBit™ goes up, so too does the amount of USD needed to make the monthly payment. We will undoubtedly be compelled to disclose this fact. Payment in CuBit™ is required because the CuBitDAO™ is the ultimate owner of each unit. To protect the money of DAO Members from inflation and volatility of fiat currencies, payment streams need to be stipulated in CuBit™ instead of fiat currencies.
In God we trust. All others must pay CuBit™.
References
Buterin, V. (2014). Ethereum: A Next-Generation Smart Contract and Decentralized Application Platform. Retrieved from [Ethereum White Paper] (https://ethereum.org/en/whitepaper/)
Meyer, S. (2024, March 11). Average length of homeownership: Americans spend less than 15 years in one home. Retrieved from theZebra.com: https://www.thezebra.com/resources/home/average-length-of-homeownership/#:~:text=47%25%20of%20Americans%20have%20lived,homeownership%20years%20is%20eight%20years.
Mortgage Bankers Association. (n.d.). Servicing Operations. Retrieved from [Mortgage Bankers Association] (https://www.mba.org/)
Szabo, N. (1997). The Idea of Smart Contracts. Retrieved from [Nick Szabo’s Papers and Concise Tutorials] (http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart_contracts_idea.html)
©2024 Universal Real Estate Wealth Protection Solutions, LLC™ All Rights Reserved.
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