By: Robert C. Hackney
As a lawyer who has dealt with real estate title issues and title insurance, I firmly believe that the entire industry will be turned upside down in the very near future. For those in the title insurance business, I believe that most of the profit will be eliminated due to new technology. This will not happen overnight, but the trend is very clear.
The Trend
Research projects applying Blockchain technology to the real estate industry have been going on since 2012. This research has revolved around the registration of titles and the purchase and sale of real estate through digital real estate transactions.
Information management relating to real estate is a massive undertaking. While the concept of a database of all property rights and the tracing of all historical transactions is a worthy goal, it is not something that will happen quickly or without governmental cooperation.
A Blockchain based system would provide a number of benefits, such as title searching which would take seconds instead of the tedious and time consuming procedure presently used. Due to the encryption used in the blockchain, identity of participants is easily verified, and inaccurate or fraudulent transactions could not be inserted into the database without consent of all real parties. The way the system works now, there are sometimes duplicate databases maintained by parties other than the government, such a large title insurance companies. Occasionally, there are conflicts in these databases which need to be reconciled. This would not be the case with a blockchain based system.
Here is a simple explanation of one way a blockchain system might work: when a property first comes into the system, it is assigned a unique “token.” This first transaction would be the genesis transaction, and the first owner would be recorded in the system. To sell or transfer the property, the token is transferred, like money being spent. To find the owner of the property, a person would search the property from the genesis transaction forward, and in the historical search would see how many times the token had been transferred. Like money, once it was spent by an owner, it could not be spent again. The person with the unspent token would be the present owner.
Cost Reduction
Title insurance and title searches are presently expensive and time consuming propositions. Title searches today can take weeks. A Goldman Sachs study found that a blockchain based title system could decrease title insurance premiums by between $2-4 billion per year. Today title insurance premiums are primarily based on the cost of underwriting, and not on the anticipated risk of loss associated with such transactions. By decreasing the underwriting cost, title premiums should be reduced substantially.
There is no doubt that the system in place today works, and seems to be adequate for its purposes. Some industry sources argue, however, that a national title registry would be safer, more efficient and cheaper over time, since today’s system is fragmented across and among numerous government agencies.
Trying to innovate in the real estate industry is really nothing new. The present system, which has been in place since our country began, is that real estate is registered in the county were it is located, and all documents relating to that property must be filed in that county to appear in the “chain of title,” including not just deeds, but easements, liens, judgments, mortgages and any other right that could affect the ownership of the property in any way. The concept of a national title registry has basically been tried before.
The MERS Experiment
Mortgage Electronic Registration Systems, Inc. (known as “MERS”) is a privately held corporation that owns and operates an electronic registry known as the MERS system. The purpose of MERS is to act as a nominee holder of mortgages in America. This was done since sales and assignments of mortgages require a transfer in the county where the property is located. As the mortgage backed securities industry grew, there was a need for a more efficient system to transfer these interests.
The entire MERS concept was based upon the model of Cede & Co. in the securities industry. To get around the massive paperwork system of transferring physical stock certificates as stock was traded, Cede & Co. created a book entry system, and stock certificates were simply issued to Cede & Co., a system that became known as “street name.” This way securities are simply held in trust, and transferred by book entry among brokerage firms as their customers trade securities on the stock exchange.
The purpose of the MERS system was to have Mortgage Electronic Registration Systems, Inc. become the Cede & Co. of the mortgage industry so that interests could be transferred without having to go to each different county in each different state when blocks of mortgages were transferred.
In the mortgage world, mortgages were typically transferred multiple times before they reach their resting place in a trust that issued mortgage backed securities, thus creating large amounts of recording fees and massive paperwork. The MERS system was designed to solve that problem. By 2007, it is believed that the MERS was the nominee holder of approximately two thirds of all mortgages in the United States.
As long as everyone paid their mortgage on time, the MERS system seemed to work as planned. The problems began when all of the defaults started happening. Foreclosure laws in the states vary substantially, and the courts in different states wrestled with how to deal with MERS. Was it really a nominee? Who was the real owner of the mortgage? Did MERS hold the promissory note? If not, did it have the right to foreclose? Were transfers made as they were supposed to be made? Different courts came to different conclusions about MERS. For all the brain power they had working on creating this system, they appear to have overlooked the basics, ie: that a mortgage is not a stock certificate.
It also came to light that there were many after-the-fact, fraudulent assignments and transfers taking place during the foreclosure process, frequently not just by banks, but by the banks foreclosure law firms.
What if there had been a distributed ledger which included all the parties involved in the subprime mortgage crisis, ie: investors, underwriters, asset managers, trustee and collateral administrators, accountants, attorneys and regulators?
All parties would be able to see what made up each and every tranche and each and every mortgage backed security and collateralized debt obligation. You could tell who bought it and sold it along the blockchain. This way each party could also get a real time view of their risk and make adjustments as necessary.
Could Blockchain technology have remedied this situation? It certainly seems that fraudulent transfers could have been avoided, or at least easily uncovered if blockchain technology were used. Could there still be a national registry using Blockchain technology? Many people think that it won’t happen overnight, but it is inevitable.
One ongoing project is happening in Cook County, Illinois. As part of the test, when a paper deed is recorded with the Cook County Recorder of Deeds, the owner will also get the transfer of a digital token as proof of ownership of the property. Cook County, through velox.RE, will use a real estate blockchain platform and issue blockchain titles to chosen property sellers.
Non-US Land Registration
Different land registry systems exist outside the United States, and in some cases are not as reliable as the current system that we use. Companies in this sector are Bitland, operating in Ghana, Bitfury in the Republic of Georgia, and ChromaWay in Sweden. In the Netherlands, ABN Amro, an Amsterdam based Dutch bank, is working with IBM to create a land registry system. They envision being able to connect to regulators including the country’s central bank and the Land Registry Office.
Other companies working on land registry are Ubitquity and Factom. According to Ubiquity, it is “currently piloting our SaaS platform with a Land Records Bureau in Brazil.” Factom appears to still be working on a real estate solution in Honduras, but due to a slow political process, has not seemed to move much in the past year or so.
Of course, there are still massive problems to overcome. In locations like the Bahamas, for example, there are certain genealogical rights in real estate, which makes it difficult to determine who might appear on the scene and claim an ownership interest in the land. All of these issues need to be addressed by legislation to ensure that blockchain technology can run smoothly in conjunction with the local legal system.
Since many people believe that the real estate industry will spawn many private blockchain systems, a group has been formed called the International Blockchain Real Estate Association (“IBREA”), which is focused on creation of standards to support the interoperability between blockchains. IBREA is a nonprofit organization and presently has over 4,500 individual members and several industry members. Their website can be found at https://www.ibrea.network/ (Note: The author is not a member of IBREA).