1. Before making a decision to purchase your diversification protection, is there a way to find out how my local market has performed over the last 1/5/10 years and prior versus a diversified national market index?
Yes, you can do so utilizing our user-friendly, proprietary Home Value Comparison Tool located near the bottom of Home page of the Home Diversification Corp website. Keep in mind when doing so that local home market prices are historically more volatile (price swings up and down – can be extreme) than a national average.* That’s due to the widely-accepted financial principle of diversification, which holds that volatility is reduced by spreading risk across multiple assets or markets; often referred to as spreading your eggs among multiple baskets versus one.
*Historic trends may not predict or be indicative of future performance.
2. If I live in a local market that has traditionally outperformed the national market, why would I want or need to purchase your diversification protection?
Our analysis indicates that local home markets that overperform the national average for periods of time eventually underperform that average in subsequent periods. Our product protects against this type of volatility over the long term, provides stability in your overall investment portfolio and delivers peace of mind not previously available. One should always keep in mind that although your local market may have outperformed the national average in the past, the past may not prove to be a good predictor of the future.
3. Exactly what kind of protection am I buying for my $19 average monthly cost? (based on a typical $225,000 home)
Our diversification agreement provides protection in a number of key areas:
*Currently in legal and regulatory review for approval. It is our intention to provide this feature.
4. Do I have to purchase your diversification protection when I originally purchase the home? Or can I do so at any time thereafter?
Starting in December 2019, you can purchase our HDA at origination or through the Diversify My Home Website (www.diversifymyhome.com) if you’re an existing homeowner. Contact us at (833) 844-4663 or email@example.com to learn more.
5. How do I purchase your protection?
Once our product launches to the public in December 2019, new home buyers will purchase at origination. As part of that process, your lender will collect all information needed. The underwriting and appraisal processes required to qualify for our Home Diversification Agreement are completed when you obtain a mortgage. We will have an additional set of documents for you to sign, including the Agreement and associated Lien documents. As is done with mortgages today, you will sign documents during the settlement process acknowledging the monthly fee, payout (or pay in) amounts at expiration and other stated provisions, as well as any penalties for failing to fulfill your payment obligations. For existing homeowners, qualification, paperwork and payments all work through a servicer – our own, or your existing servicer if they have an agreement with HDC.
6. Is this product considered a mortgage? If so, why do I have to take out a second mortgage to buy your diversification protection?
Our diversification product is not a mortgage* – there is no balance that requires a monthly mortgage payment. It is considered a financial instrument that is secured by a lien, much like those issued by contractors for work performed. Technically, it’s a second lien with an initial zero-balance that will fluctuate positive or negative depending on the performance of your local market relative to a national market index. The second-lien requirement is used to secure repayment of any outstanding balance only at when you sell your home (or cancellation of the HDA contract) in the event your local market outperforms the national market.
7. Does the second-lien make it harder for me to refinance my first mortgage if interest rates fall?
Our Home Diversification Agreement states clearly upfront that we agree to subordinate our lien to make it easier for you to refinance or to obtain a Home Equity Loan.
8. How am I able to avoid using and paying for PMI, FHA or similar using your product?
We believe that homeowners utilizing our home diversification agreement will eventually enjoy the benefit of mortgages with lower down payments (without PMI), creating saving of hundreds of dollars in monthly PMI and the real possibility of a reduced interest rate. This is based on preliminary discussions with banks and creditors who have indicated support for a measure of this type,* given the significant reduction in their own credit risk due to the reduction in homeowners’ foreclosure risk when a home diversification agreement is in place.
*The feature and benefits will not be available initially. We are currently in talks with creditors and securitizers on this offering. It is our opinion this feature will become available to homeowners in the foreseeable future.
9. Given the use of local and national home price indices (HPI), does the price I pay for my home and what I sell it for factor into whether I benefit from buying your diversification protection? Or is the potential benefit based exclusively on the relative performance of the local-HPI versus a national-HPI?
No – you would price and sell your home as you normally would. Using home price indices keeps in place appropriate homeowner incentives to maintain their properties and negotiate the best sales price. (see Scenario Descriptions table below, scenarios 1 and 2)
10. Are there numeric examples of what my Home Diversification Agreement balances would look like for different home price performance scenarios?
11. If my local home-price index rose faster than home prices nationally when I sell, do I owe Home Diversification Corp anything?
You may; please see the chart in question #10, scenarios #5 and #6 for relevant scenarios. It is important to note that in many cases the amount owed to HDC may be fully covered by the Sales Price.
12. How can I determine what my benefit payment might be before selling my home in an underperforming local market? How do I determine my liability before selling my home in an overperforming local market?
You will receive monthly statements indicating the positive or negative balance in your Home Diversification Corp account. You can also view your balance at any time by accessing your account through the HDC website. At closing, you will receive the payoff or payout balance amount.
13. Can I cancel the diversification protection at any point if my local-HPI index has outperformed or underperformed to the national-HPI? If so, how? Is there a cost or penalty to do so?
There are two scenarios: your account could be either “in the money” or “out of the money” at the point in time you are considering a cancellation. “In the money” means that your account has a positive account balance; if you were to sell in that instance, HDC would owe you money at closing. “Out of the money” means you have a negative account balance; if you were to sell in that instance, you would owe HDC money at closing.
Early termination (“in the money”) – you may terminate your “in the money” contract at any time but your payout is limited to 50% of the positive balance (the remainder is forfeited to HDC).
Early Termination (“out of the money”) – you may terminate your “out of the money” contract at any time but that requires full payment to clear any “out of the money” position.
14. What happens if I fail to maintain my monthly payments? Will my agreement be cancelled even if I have a credit balance in my account?
Non-payment (“in the money”) – If you stop making the required monthly payments, that normal payment amount will be deducted from your balance plus an additional $10 penalty for each payment (the “payment deduction would be their normal payment plus $10) for up to 6 months (provided there are adequate positive funds available to cover that time period). If you do not resume making payments prior to the end of those six months of forced-charged late payments (or sooner if there are less than 6 months of positive balance available), your contract will be closed out following the process for “Early termination (in the money)” positions. Non-payment (“out of the money”) – If you stop making the required monthly payments, payments will continue to be charged against their balance plus an additional $10 penalty for each payment (the “payment charge” would be their normal payment plus $10). While in an overdue status, we reserve the right to undertake collections activity and you will be responsible for any costs associated with those actions. Upon the sale of the property, all amounts due will be required to clear the property title.
15. What are the tax implications of utilizing a Home Diversification Agreement?
We are not tax consultants and offer no tax advice – you should consult with a tax advisor for your specific situation.
16. How exactly does the Home Diversification Agreement work as a financial instrument when it does not involve investment?
Technically, a Home Diversification Agreement is not a diversification or investment instrument at all, but a hedge agreement carried out between multiple counterparties (who are usually but not necessarily individual homeowners). Home Diversification Corp acts as the risk transfer and portfolio management agent for this set of inter-party contracts that create the hedge benefit. Diversification and Hedging are really more cousins than identical twins. The difference between diversification and hedging is that diversification involves investment assets that are uncorrelated and selected to create positive investment returns while reducing risk, while hedging involves derivative instruments that are negatively correlated and selected to create a zero expected return as the underlying instruments counteract each other to reduce risk.
17. If it is not precisely a diversification product, why is it called the Home Diversification Agreement?
Great question! In market testing, we found ordinary homeowners without a financial services background typically did not understand exactly what a “hedge” product is or does and found after testing that it was unrealistic to educate consumers as to the technical terminology of the trade. We did find the financial services term related to risk-management that most homeowners understood most generally to be diversification, which they relate to from learning about mutual funds, reading financial magazines and watching financial television. Because diversification and hedging are both risk reduction techniques, we found a stylized use of the term “diversification” was the best way to get across the flavor of what a Home Diversification Agreement is. It certainly rolls off the tongue a bit more smoothly than “Home Price Index Hedge Swap Contract” which is a more literal description of our system.