Issue 14: Solving the closing conundrum with Blockchain…so close, yet so far away.
Deeper Thoughts is taking a…well, deeper look at some of the shiny new technologies folks are talking about in our industry. But we’re starting at the challenge they address and working backwards. Today, we’re talking blockchain.
The ages-old industry challenge: It’s no secret that the closing is the Achilles’ Heel of the American Dream from many perspectives. Today’s closing and settlement, much like that of 20 years ago, is still a slow, manual process involving multiple handoffs and multiple service providers. Prone to error, delay and fraud, this portion of the transaction tends to bring the most angst; generate the most frustration and open the Pandora’s Box to the mortgage industry equivalent of an emergency landing. All too frequently. And the title search, considered the kickoff to this stage of the mortgage process, can also be an incredibly manual process—mostly due to the inconsistent and human-powered approach we’ve taken for centuries to track the key records and documents. According to one report, an estimated 3,600 counties, towns, and other jurisdictions maintain records of local land title transactions. Some older records have not been digitized and can only be viewed by visiting a town clerk’s office.
Marc Shaw wrote a great article not long ago in Forbes. It’s worth checking out. In it, he beautifully encapsulates the challenge:
“Title companies are in the business of ensuring that property transfers and mortgages are processed correctly. A key component of this process involves providing insurance to guarantee rights. The insurance is necessary for many reasons, including the fundamental lack of accuracy and trust in record keeping. The chain of title to a parcel of land may be tampered with, become inaccurate or be breached due to many risks, not the least of which is fraud perpetrated against the property owner. Defects in title may include invalid powers of attorney, deeds by minors, improperly recorded documents, undisclosed heirs, gaps in the chain of title, false impersonations, incorrect legal descriptions, errors in the tax records, IRS or other tax liens and even forged documents.
Title companies also verify and then ensure that a buyer or lender is getting clean and marketable ownership or lien position in the land. Moreover, a title company prepares and moderates the execution of the closing documents and records any deed, mortgage, assignment or UCC in the county registrar’s office. In most states, title companies are also trusted to be the intermediary from an escrow, funding and disbursement perspective between the buyer and seller, possible bank and borrower, as well as all other parties to the transaction.” “Will the Power of Blockchain Mean the End of Title Insurance Companies In 20 Years?” Forbes Magazine (Marc Shaw, June 22, 2018)
And before anyone tries to turn this into a “what’s the point of title insurance, anyway?” debate, remember that a quarter of all title reports locate some kind of defect in title, according to ALTA. A Goldman Sachs report even suggested that number is closer to 30%. Turn that into dollars and the margin compression we’ve all been fighting only gets worse!
Blockchain creates, essentially, an unchangeable record built upon previous entries. It’s almost impossible to go back and tamper with or even edit what’s in the record. It can’t get lost. It can’t be removed. So, the title search isn’t dependent on finding (and sometimes, “re-finding”) old data. Trusted parties must “sign off” on the initial entry. Plus, all of this facilitates a quick, easy exchange of funding when the deal is ready to be consummated.
I’m also going to borrow Mr. Shaw’s well-worded vision of a mortgage industry that handles title and closing using Blockchain: “Imagine: Executing a ‘smart contract’ upon locating a home online, clicking a few buttons and automatically updating ownership and transferring funds between parties, all via the blockchain. The closing process could become effortless and frictionless and far superior to today’s standard closing.”
Sounds great, right? Sure! But we’re not there yet. First we have to somehow recapture hundreds of years of vital documents—preferably weeding out the mistakes and errors already baked into that history—by both recapturing that morass of inconsistent data and digitizing it, and by starting to capture documents and transactions electronically and consistently going forward. We need to truly adopt smart contracts. We’ve come a long way with regard to e-closings, but we’re not anywhere close to 100% adoption yet.
At this point, many title agents get a little antsy. “Won’t this eliminate my industry?” According to Shaw (and I agree wholeheartedly), nope. It will, however, force the evolution of what the title agent or title company of the future does.
“A title blockchain will not be able to account for items that are not on the chain, such as bankruptcy, divorces, civil litigation, child support, IRS liens and more. These are all items that impact the marketability of title to a property. Non-recorded defects such as these are a major problem for those blockchain proponents who want to suggest title insurance will not be needed. What happens when a property is purchased and there is a prior IRS lien? Nuisance lien? Municipal code violation or utility violation? Guess who covers these items? That’s right, the title company.”
Let’s toss HOA-related liens and “super liens” in there too, shall we?
We’re still a long way off from a blockchain-driven title industry. And there are a lot of nuances we just can’t cover in a short post like this. But I’d argue that a lot of the superficial concern out there is more about how much work we need to do to get to a blockchain settlement…and a lot of anxiety about change. It’s coming, though. It’s coming.
By the way, if you have some challenges you’d like to see us discuss in the context of “new” technology, send them our way! Just email me at email@example.com.
Until Next Week,