A Quest For The Digitally Confounded

Title Insurance 

The question of whether or not blockchain will eliminate the need for title insurance began surfacing in housing and money media at least six years ago. Financial analysts had high expectations for blockchain to revolutionize the industry and this was an area of particular interest. 

But all that hasn’t quite happened yet and the experts aren’t even so sure it will anymore. 

“I’ve seen over the years how blockchain could disrupt the industry,” says Jeremy Yohe, vice president of communications for the American Land Title Association (ALTA). “Blockchain is, to simplify it, a different way to store data. But any way you store it, there’s still gonna be that threat that it could be hacked, it could be altered, it could be stolen, it could be changed, it could be fraud.”

Since its founding in Washington, D.C. in 1907, ALTA has been a resource for title and settlement companies. The organization now represents more than 6,000, and ALTA title insurance remains the industry standard for lenders and homeowners. 

“At the end of the day, you still need a backstop to protect your property rights. And title insurance is the best option to protect these rights,” Yohe says. “Without it lenders would be taking on a lot more risk and they would have to price their products accordingly.”

A homeowner’s title insurance policy is optional, but also the only product that protects borrowers’ property rights for a one-time fee. In an ownership dispute, for example, the title company representing the policyholder covers all court costs, attorney fees, and a settlement, if applicable.

Watch it on The Interest: Decoding Blockchain’s Role In Mortgage

Borrowers can fall in love with a property and secure financing, but then it takes some detective work before the title or proof of ownership is effectively transferred to their hands.

“That’s when our people step in,” Yohe explains. “The title agent is searching the public records to see if there’s any red flags that need to be addressed before the transaction can proceed. There’s a lot of strange things across this country that give people access to properties.”

A century-old easement for a portion of the front yard, for example, or a utility line preventing the property owner from digging the summer oasis of their dreams. 

Much of that information is still in paper form - in government buildings, library archives and elsewhere. What and where is it not? A block on a chain. That’s not to say this facet of the industry has not progressed with the times. 

“Not everything can be done in a day, but the title industry has made significant strides to use technology to expedite the process,” Yohe says. “It’s modified products over the years to provide lenders the type of efficiency and coverage they may need on a mortgage, on a refinance, on a HELOC, on a home equity. And at the end of the day, it gives the lender peace of mind that they’re protected, that they have first lien priority.”

This past spring ALTA modified its industry best practices to include risk mitigation driven by modern contrivances like digital payments and blockchain. For example, it is now recommended that title companies use a wire verification service to ensure funds found their place in the correct account.

ALTA is also backing federal legislation to permit remote online notarization nationwide. 

“We really think the government should provide a pathway to continue to allow the industry to use technology that maintains a standard of safety and security for consumers and service providers,” Yohe says. “A lot of situations may make it difficult to have the flexibility to sign documents. Not to say that it’s going to replace the entire process, but it’s an option to give consumers if they want it.”

In 2023, there are 43 states that have adopted some degree of permanent Remote Online Notarization (RON) laws.

America Online

Norman Roos, partner at Robinson+Cole Finance Group in Connecticut, has been working in the mortgage industry for the last 50 years. In that time he’s gained extensive experience in electronic contracts, digital signatures and online servicing. Around the turn of the last century, he convened a task force to consider the adoption of electronic recording in Connecticut. To this day, the Puritan-settled New England state still has not permitted remote notarization. 

“There’s a difference between blockchain and digitization of services,” Roos points out. “When you look at the technological impact on the mortgage industry so far, largely blockchain hasn’t played a role. It was a brilliant idea and it has had a number of successful use cases. I don’t think blockchain is going to transform the mortgage industry anytime soon.”

He means residential lending specifically, the most heavily regulated sector.

“A home is probably the biggest purchase you’ll ever make. It’s a very large, very important transaction. And it’s highly regulated because the potential for abuse or for problems if things don’t go well is enormous.”

Just like when many people thought they understood collateralized debt obligations before the 2008 financial crisis, Roos recalls, only to find out they were duped by the complex asset-backed security (ABS). 

“This tool, which was thought to be a very efficient tool, turned out to be terribly misused. I think with blockchain, while it’s not the same … I don’t know anybody who really understands it.”

Those who have delved into the intricacies of this still-unregulated arena may have also heard the term stablecoin. It is a digital currency that obligates its issuer to convert each unit of token into $1 upon demand. 

“Unlike bank deposits, stablecoins are not regulated, and the way they report the assets backing their liabilities is very different from that of a bank,” said economist Daniel Sanches in a report for the Philadelphia Federal Reserve.

Regulatory Hurdles 

The fact that there is no centralized hub for blockchain is perhaps its most valuable asset as well as the highest hurdle to wider use by mortgage industry professionals. 

“When you go to a bank, you see this big building with pillars in front of it. And presumably the money would be there because it’s a trusted institution. There were regulators who made sure it acted in a safe and sound manner,” Roos says. “The idea with this distributed-ledger system is that there is no central authority to whom you can look if something goes wrong. I think for reasons of lack of transparency, lack of accountability … there’s going to be a reluctance to use blockchain widely or immediately in a lot of different applications. I may be proven wrong, but that’s my suspicion.”

Insurance and mortgage are highly regulated industries. The Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), known together as TRID, is a series of rules enforced by the Consumer Financial Protection Bureau (CFPB). Lots of time, money and resources were invested by financial companies to ensure compliance and good business practices with the passage of these and other laws.

“If a mortgage company decided they want to create their own blockchain and operate their origination or servicing system using blockchain, I think they would get a quick visit from their regulator, be it the Department of Banking or some other regulatory agency,” Roos points out.

Most people don’t know the inner workings of the car they drive, but trust its basic safety after obtaining insurance and registration, and have some idea of where to go if it needs repairing. 

“Who’s gonna perform that role for blockchain? It takes care of itself, right?” says Roos. “I’m very interested to see if it can be applied in a broader manner, but I’m not confident that will happen anytime soon.”

The Way It’s Always Been 

As a regulatory lawyer in financial services for most of his career, Roos has watched tech evolve and knows industry changes are inevitable.

“I just don’t know that blockchain, which is one technological tool essentially, is going to be driving that change,” he says. “I think technology can be very helpful to streamline the processes, cut costs, and provide better services. But I think we just have to be careful about it. There are some limitations of blockchain and it’s a little opaque to most people.”

As long as public records were kept, real estate transactions, property transfers and deeds have been recorded in local government offices, with times stamped and fees paid. Homeowners owe taxes to the county or municipality in which they reside, after all. 

Thousands of these recording offices exist across the U.S. and each has its own processes and practices. However, even as technology progresses, the manner in which a homeowner registers their property has not changed.

“In this day and age, they still continue to do things the way they did it many years ago,” Roos says. “And everybody likes to do it their own way.”

Instituting a single recording office for say - the entire U.S - might eventually prove more efficient, but it would also be quite an undertaking.

With that said, energy efficiency is one of the world’s top priorities right now and the blockchain mining process demands high energy consumption. Bitcoin alone is estimated to consume 127 terawatt-hours (TWh) per year, which is more energy, electricity and heat than many countries. 

While technological advancements continue to deliver new solutions to the mortgage industry, will blockchain be a gamechanger?

“I don’t consider it up there with the invention of fire or the wheel,” Roos says. 

Equilibrium Mortgage Solutions founder Paul Campbell has higher expectations.

“Blockchain represents the ability to omit specific pieces of data and still have a grasp on the entire flow of a loan,” says Campbell, who is also executive vice president of lending at Kwik Mortgage. “It gives individuals the ability to work on separate pieces and then holistically allows the system to put it all together, which I think in the long run is going to create efficiencies and reduce fraud, identity theft and things of that nature. I see blockchain as it continues to mature, to be a tremendous tool to the financial services industry and that includes home mortgage.”

The Studies

Only one-quarter of lenders surveyed in 2022 by Fannie Mae told the enterprise they were familiar with blockchain technology and its possible applications in the mortgage business. Of the 20% of lenders that said they have looked into blockchain, 41% plan to adopt it within four years. Although familiarity with blockchain still seems low among industry professionals, about 40% of study respondents said they believe decentralized finance - what defines blockchain - has high to very high potential to disrupt incumbent financial institutions.

Whether or not blockchain will cause a small rift in the mortgage industry or a collision equivalent to the impact of a large asteroid appears to be up to lawmakers and regulators. 

Congress is now working to expand its crypto industry oversight by defining the jurisdiction of the Commodity Futures Trading Commission and Securities and Exchange Commission. 

The SEC has stated that most cryptocurrencies are securities and subject to investor protection rules, a claim disputed by most crypto companies.