Protected industries

Every industry has self-protecting systems to keep new competition out. It might be a high regulatory burden, government-granted monopolies, or high startup costs. The industry that has built up around the buying and selling of real estate hasn’t changed much in the last 40 years and is ripe for disruption. Many different parties contribute to the process.

Here are the different industries that are built around the buying and selling of homes:

• Real estate agents: A real estate agent helps you compare different neighborhoods and find a home. He often helps you negotiate a price and communicates with the seller on your behalf. This service is valuable, and it’s not likely to be displaced by blockchain technology. You can already buy a home without a real estate agent — people choose to work with them because they improve the process.
• Home inspectors: Home inspectors uncover defects with the house before you buy it — defects that could cost you money down the road. The defects home inspectors find can be used to negotiate with the seller for a better price. In the future, homes will continue to have wear and tear — that’ll never change. But blockchain technology could be used to record repairs to property and defects found in the inspection.
• Closing representatives: At closing, the final step is settlement. The closing representative supervises and coordinates the closing documents, records them, and releases the money to the appropriate parties. Closing representatives may be displaced by blockchain technology — the functions performed by closing representatives could be built into smart contracts or chaincode.
• Mortgage lenders and servicers: Mortgage lenders and servicers provide funds for a mortgage and collect the ongoing mortgage payments. They won’t be displaced with blockchain software, but they may use blockchain technology to help them reduce costs with record keeping and auditing.
• Real estate appraisers: The real estate appraiser’s job is to look at a property and determine how much it’s worth. The appraisal process is done every time a property is bought or refinanced. Companies like Zillow have taken a lot of the legwork out of knowing the market value, but each home is unique and needs to be assessed periodically. Even in the real estate mortgage process, multiple appeals may be called for to meet everyone’s needs. It might be useful to record this data within a blockchain as a public witness.
• Loan officers: Loan officers use your credit, financial, and employment information to see if you qualify for a mortgage. They then match what you’re eligible for with products that they sell. Like a real estate agent, a loan officer helps you get the best option across a spectrum of choices. Blockchain software may be used to help loan officers keep track of documents that they give you and audit the process for fair lending law compliance.
• Loan processors: A loan processor assists loan officers in preparing mortgage loan information and the application for presentation to the underwriter. Software that pulls the buyer’s source information is being explored. It’s not blockchain technology, but it could be disruptive for this position.
• Mortgage underwriters: A mortgage underwriter determines whether you’re eligible for a mortgage loan. She approves or rejects your mortgage loan application based on your credit history, employment, assets, and debts. Organizations are exploring automating the underwriting process using artificial intelligence. It’s not blockchain technology, though.

Each of these agents serves a core purpose that helps protect the buyer, seller, and mortgage provider. In most industries, the cost of doing business goes down over time — improvements in efficiency brought about by competition and innovation contribute to driving down cost. The mortgage industry is attractive as a candidate for blockchain innovation, because the opposite has occurred: The cost of business has gone up. The typical U.S. mortgage is over 500 pages and costs $7,500 to originate. This is three times what it cost ten years ago. Blockchain technology can meet the needs of protecting the buyer, seller, and mortgage provider while reducing the cost to do so.

Consumers and Fannie Mae

The Federal National Mortgage Association (known as Fannie Mae) is both a government-sponsored enterprise and a publicly traded company. It’s currently the leading source of financing for mortgage lenders and has dominated the market post-recession as private money left.

Since the recession, 95 percent of all home loans made in the United States have come through Fannie Mae. This is about $5 trillion in mortgage assets. With few exceptions, loans that are not done through Fannie Mae or its close cousin, Freddie Mac, are jumbo loans (typically more than $417,000 each). These loans are still funded through private money.

Fannie Mae has an automated program used by loan originators to qualify a borrower. It helps them navigate guidelines for a conventional loan. Lenders run your loan application through Fannie Mae’s computer system, and it spits out an answer of either approve or decline for your loan. Online platforms are using this new software to reach consumers, allowing them to bypass traditional retail locations. Fannie Mae and Freddie Mac are exploring blockchain technology to even further streamline this process and reach customers directly.

Reducing your origination costs

Mortgage origination costs have increased, and the reason is simple: Banks fear fines that they can incur if they mess up any part of the mortgage process. So, the industry has put in steps to help make sure that they meet all the requirements at the time of origination and years later when they’re audited. Big banks have paid billions in fines from the mishandling of documents. They’re now required not only to have all the essential documents, but also to prove that they followed the correct process and sent you all the necessary documents.

Blockchain-based products reduce the redundancy that banks began incorporating into their process after the recession. Record keeping and auditing expenses have skyrocketed since the introduction of the Dodd–Frank Wall Street Reform and Consumer Protection Act, and blockchain technology could reduce that cost.

Companies wanting to meet the needs of banks with a blockchain solution would need to let banks prove that they followed the guidelines set out in Dodd–Frank. It would also help banks document why they made certain decisions on loans, and help them locate documents that were used in origination, even if they aren’t in possession of them.

Blockchain applications could put close to $4,000 back on the table for the average home purchase. The mortgage industry is a lot like the car loan industry and the credit card industry. Similar applications could reduce the administration cost that these industries have due to consumer protection laws, while at the same time letting companies meet those requirements.

Knowing your last-known document

One of the largest cost drivers in the mortgage origination process often comes years after the loan was first made. Sometimes those facilitating the loan process add unneeded documents into client files, or old files that aren’t used to originate a loan are left in the folder. Also, duplicate records may occur. When it comes time to audit the file, there is too much information to sift through. Banks pay money to outside firms to check their records and try to determine what documents were used in the final dissection on your loan.

Blockchain software can solve this problem in an elegant way. Blockchains are distributed record-keeping systems that allow for multiple parties to collaborate on data over time without losing track of what that data looked like at any given point along the way. This means that the half dozen individual organizations that collaborate to help you buy your home can now all interact on the same chain.

A chain in this use case would start with you. Your chain would then have subchains added to it over time, such as the purchase of a home. You could then authorize others — such as banks, employers, credit agencies, appraisal companies, and the like — to write against the chain. They would each add their data to your chain, and the other authorized parties could read this data and add their own.

Blockchains would change the need for central repositories for files. It would automate some of the processing of the paperwork, and would always give a clear history of your loan, reducing the need to audit and prepare documents to be verified.

This is a big idea, but it doesn’t require the whole ecosystem to collaborate. Each branch that does would strengthen the system and add value, much like the way each additional person who owned a fax machine made the power of having one that much more useful.

The United States and Europe: Infrastructure congestion

The United States and European countries may take longer to implement blockchain technology than other countries. Even though companies in these countries spend billions of dollars on infrastructure maintenance, it’s just that: maintenance. There are already existing solutions to the problems that blockchains want to solve. It’s not just a matter of saying that blockchains would offer a better solution — that solution must be ten times better than an existing system or be able to implement through integration.

One of the main challenges that the United States faces is that it’s decentralized in the distribution of power and decision-making. Each county and each state will come up with its own rules for how to implement or use blockchain technology. This process has already begun.

Blockchains can trigger money transmitter laws and regulations. In the United States, it’s clearer at a federal level what types of businesses are considered money transmitters. Given that all the essential public blockchains currently use a cryptocurrency token to drive security, the issue is clouded, which has given rise to private and permission blockchains that operate without tokens.

State licensure requirements are ambiguous for companies using blockchain technology for applications other than payments. Regulations and laws will be enacted to protect consumers. Europe already has laws around “being forgotten.” Compliance with these rules could be tricky when data entered into blockchains is around forever and can’t be removed by anyone, even if they wanted to.

Being engaged in money transmission in many U.S. states is a felony if you aren’t properly licensed. The hard consequences of overstepping law through innovation compel blockchain companies to spend significantly more money and time on compliance — to the tune of an average of $2 million to $7 million per year per company because they must meet regulatory requirements in all 50 states. The legal fees are heavy burdens for these technology startups.

The legislation of each state as applied to the blockchain industry is not clear yet. New York and Vermont have begun integrating this technology into law. New York has increased the cost to be in compliance and driven innovation to move to friendlier locations. Vermont, on the other hand, passed a law that makes blockchain records admissible in court.

Luxembourg created a legal framework for electronic payment establishments in 2011 and was early on the idea of “electronic money.” Luxembourg and the UK have become home to many blockchain companies because the regulatory environment is easier for them to navigate and afford. For less than $1 million, blockchain businesses can obtain a payment instrument license in the European Union. This license grants companies access to 28 EU countries. This approach has allowed the EU to advance beyond the United States in fintech innovation.

China: Uncertain state

Bitcoin and other cryptocurrencies have had bipolar standing in China for years. The country took its first hostile stance against crypto industry since 2013 when it rolled out its first set of crypto restrictions. In 2017, the government issued a ban on initial coin offerings (ICOs). As a result, many crypto entrepreneurs have fled China for fear of arrest. The crackdowns are part of a broader pattern of tightening and then losing regulation in China. This ebb and flow have made it difficult for blockchain companies to operate in the country, and many have been forced to shut down or relocate. Given this history, it’s not surprising that so many of the early blockchain companies in China have disappeared.

Bitcoin and other cryptocurrencies have long been seen as a threat to China’s economy and financial stability. In 2021, the Chinese government took action to crack down on cryptocurrency trading and mining in what is seen as one of the most intense crackdowns in the world. The move significantly impacted the global cryptocurrency market, as China has been a major player in Bitcoin mining and trading. However, the Chinese government is not entirely opposed to blockchain technology and is instead pursuing other uses for it, such as supply chain management and nonfungible tokens (NFTs). The key difference is that these applications must be under the control of the government, which goes against blockchain’s decentralized and unrestricted nature.

It remains to be seen how this crackdown will affect China’s role in the global cryptocurrency market, but it’s clear that the government is intent on maintaining tight control over the use of blockchain technology within its borders.

The developing world: Roadblocks to blockchain

The future is here — it’s just not distributed. This is especially true in developing countries, which often have a greater need for technology, yet don’t have the same resources or the right political environment to allow those innovations to take root. Some small countries try protectionist measures that block the importation of goods that could be made within their borders; other countries mistrust the quality and benevolence of products and services that come from the outside sources as well. On a darker note, some political systems benefit too greatly from the inefficiencies and ambiguities that their legal system has in place to change.

Hernando de Soto Polar is a Peruvian economist and author who has spoken widely on an informal economy and the importance of business and property rights. One of the prominent issues that keeps the developing world undeveloped is dead capital. The property that is informally held and not legally recognized with the current systems in place cannot be trusted. For owners of this land, it is difficult or impossible to finance and sell. The uncertainty also decreases the value of the assets. The Western world has been able to borrow against assets and sell them relatively freely. This has driven innovation and economic prosperity.

The technology that is enabled by blockchains could change that reality for developing countries very quickly. Clear ownership records for land would mean that it would be sellable and financeable. This would make the beachfront property of Colombia irresistible. Irreversible payments and true known identity would open credit and commerce in new ways.

Many startups and hackers have come together to try to make this future vision a reality. Even larger global players like the World Bank have had repeated meetings about blockchain and its impact in the developing world. Bitcoin and blockchain are making inroads in Africa where local currencies and infrastructure are deeply mistrusted. AZA Finance, a payment and trading platform servicing many countries in Africa, has begun expanding to the UK and Europe. It has also started widening its service offerings to things like payroll.

As many roadblocks as developing countries have toward development and innovation, they also have advantages that Western countries will never overcome. The lack of existing infrastructure in developing countries makes it easier for them to leapfrog Western nations. This was evident in the proliferation of cellphones in developing countries. Developing countries also don’t have the same regulatory bodies and consumer protections. This is particularly attractive for blockchain startups that fall into the gray zone in Western countries. Developing countries often have fewer decision makers, making it easier to meet people who have the power to change.