Startups – a Threat to Title Insurance or a Solution Looking for a Problem?

Title insurance agents might have a new competitor entering the title and escrow arena.

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Title insurance agents might have a new competitor entering the title and escrow arena. A startup company from Seattle named Modus opened early this July. Modus allows real estate agents to use its resources as a title and escrow workshop, bypassing a traditional title firm altogether. Both agents and clients can log onto the company’s platform to track every step of the closing process. By using a shared platform, the service reduces the potential for fraud and speeds up closing by eliminating the back-and-forth of personal and financial information via email. Agents also will have the ability to outsource manual data entry, cutting down on time for closings once more.

Modus is not the only start-up offering such services. The fledgling company is joining names such as Spruce and JetClosing, startups which offer similar services for the sake of simplifying the title and escrow process. The increasing popularity of such companies raises concerns among title companies- will existing firms have to provide more to compete with these young startups?

startups2     Or does this sound like these companies are trying to offer a solution that is looking for a problem?  If someone had a problem at a closing it could have either been a bad real estate agent or an escrow agent.  Typically it is the buyers that pick the escrow, but in today’s market it seems to be this responsibility has fallen on the listing agent, whose primary job is first and foremost a marketing one.  The listing agent does not directly sell your house, but they should be the reason your house sells.  Thus being knowledgeable in escrow is not a primary responsibility for them.

Then there could also be issues with banks accepting electronic signatures when it startups3comes to payoffs on the seller’s mortgage and getting new loan documents on the buyer’s loan.  When it comes to real estate transactions, electronic signatures are enforceable, however certain documents (e.g. mortgages and deeds) will require original signatures for recordation.  Borrowers and lenders continue to require originally executed notes to maximize their comfort level that there is only one negotiable instrument.

DIGITAL TECHNOLOGY & ITS IMPACT ON REAL ESTATE TRANSACTIONS

PRESENTED BY MICHELLE GARCIA GILBERT, ESQ.

GILBERT GARCIA GROUP, P.A.  | SAPPHIRE TITLE & ESCROW COMPANY

 

 DIGITAL TECHNOLOGY

Bitcoin, virtual currency, example of blockchain (or distributed ledger) technology

  • Released at time of financial crisis, due to advances in software, communication and encryption
  • Established set of rules that ensured integrity of data exchanged among computers globally, without use of government or other trusted third party
  • Ledger recording transfer of bitcoins resides on virtual network which uses encryption and secure keys for transactions; each transfer is recorded in a block of information
  • Each block has time stamp and link to prior block which creates permanent record that is almost impossible to alter
  • Technology is being used for other distributed ledgers

APPLICATIONS

Digitally record tangible and intangible assets in a system that is more trustworthy, transparent and verifiable than any other

  • Private blockchains, not public like Bitcoin, participants  verified against pre-approved list
  • Collaboration among many participants required
  • Common technical standards and processes required Participants must share information
  • Resource intensive
  • Legal concerns regarding intellectual property, data privacy, data security, anti-money laundering, settlement finality and securities requirements

 

REAL ESTATE TRANSACTIONS NOW

Old-fashioned industry with paper contracts, manual escrow deposits, hard files, and in-person closings

  • U.S. net worth totals $89 trillion, household ownership of real estate is $27 trillion out of a total of $33 trillion of  nonfinancial  assets
  • 2016- outstanding real estate debt was $11.5 trillion residential and $2.6 trillion nonresidential
  • Industry has long history of state and local regulation, lobbying power of real estate agents, and interaction with laws, tax code and American culture of home ownership
  • Establishing property rights involves navigating lawyers, insurance agents, realtors and title agents
  • Current state of affairs: brokers and realtors facilitate transaction for a fee; parties can use an attorney in addition to an agent or in lieu of an agent, to prepare a contract;  contract uncertainties exists with contingency for inspect ions, appraisals, state of title, and financing; title search is performed to determine state of title and requirements that must be met to convey marketable title; title insurance is provided as part of the transaction; 2016- 88% of all buyers financed homes; closing – most take 1-2 months to get to the table, and the closing itself can last hours

 

REAL ESTATE TRANSACTIONS IN THE FUTURE

Blockchain technology has the potential to address uncertainties in real estate transactions by providing more direct, precise and efficient process.

  • Smart contracts: digitally signed agreement, stored on blockchain program would speed closings be­cause payment would trigger automatic transfer of title; limited use for structuring of agreements, and handling of breaches and dispute resolution; also, without common technical standards and processes, suspect to hacking
  • Land records: outdated system in which paper filings are maintained as a chain of title by local government office; manual process with high potential for error and fraud; risk mitigated by purchase of title insurance, though about 5% of premiums paid out in claims in 2016; In September, 2016, Cook County, Illinois launched a pilot program to current system with public blockchain technology; Cook county never completed a blockchain conveyance but reported alter the pilot ended, in May, 2017, “…that blockchain and distributed ledgers are natural fit for keeping land records and stream lining the dozens of intermediate steps needed just to get a deed into public record.”
  • Transaction platforms: Encrypted, secure and distributed ledgers provide a way to execute transactions with little or no intervention by people. Instead of involving many employees, third-party agents and paper processes in a transaction flow that takes days, weeks or longer, huge volumes of transactions will be com­ pleted very quickly and transparently. Financial institutions, in particular, have been struggling with business process inefficiencies, but such inefficiencies exist in other industries, including real estate.
  • States opting in: Blockchain recognized as a legitimate form of ownership.

 

WHAT IS HAPPENING NOW…

  • Countries like Georgia and Ukraine have already implemented blockchain, as the start-up Propy executed the first real estate transaction through cryptocurrency, in which a San Francisco investor bought a house in Kiev for $60,000 in Ethereum tokens (another cryptocurrency)
  • And more examples to be provided