May 30, 2017
Thanks for taking the time for this interview, can you give a brief background about yourself?
I joined ChromaWay after 15-years working on mortgage technology initiatives with Fannie Mae. Previous to that I led projects at PwC and HP/EDS on business process transformation. ChromaWay was one of the first companies to extend the use of blockchain beyond bitcoin into other areas. We have offices in Stockholm and Tel Aviv and several high profile projects including an initiative with the land registry in Sweden. I am now leading our work here in the US, with a particular focus on the mortgage industry.
Will blockchain actually help the mortgage market in the US? Some are suggesting it is mainly hype.
The US has a dynamic housing market. Foreign investors flock to our mortgage-backed securities, and few other countries can offer consumers a fixed-rate 30-year mortgage. On the other hand, our mortgage process is overly complicated and costly. It can take over 50 days to close a loan, and for a $200,000 mortgage, buyers can shell out over $2,200 in fees. The cost of a lender to produce a loan is nearly $7,000. While the internet has made the front-end application and underwriting evaluation for a loan much easier, the underlying system for loan origination, servicing, and securitization hasn’t changed that much. The blockchain provides an unprecedented opportunity to share data and execute transactions in a faster, cheaper, and more secure way.
How exactly does using blockchain make the mortgage process faster and more secure?
In the current production process, data and documents have to be pushed (or re-created) from system-to-system as the loan is constructed in an assembly line involving the real estate broker, mortgage broker, vendors (e.g., credit, title, and appraisal, etc.), originator, servicers, county recorders, and investors. Think of trying to build a car where the assembly line crosses multiple production plants with each one adding their own component without being exactly sure what the other plant did. The blockchain can serve as both an immutable, shared repository of data needed to create the mortgage “parts” and as a platform to facilitate the accelerated assembly of the loan. Because data and documents comprising the loan will require cryptographic access and signatures, the process will be much more secure from fraud and the resulting asset of higher value.
What are the most common types of fraud in the US and foreign real estate markets?
When talking about residential real estate fraud, it's best to divide it into two buckets: (1) Mortgage Fraud and (2) Deed Fraud.
(1) Mortgage fraud includes misrepresentations of income, identity, or property debts. Transaction fraud is included in this bucket when there are undisclosed agreements between parties like the straw buyer issue often part of property flipping schemes. This type of fraud has become so prevalent that Core Logic recently raised their national fraud index to its highest level since the end of the mortgage market crisis in 2010.
(2) Deed fraud is when a fraudulent deed is recorded against a property. It’s particularly insidious because the actual owner may not even be aware of it. In most states, the owner of a property or an authorized representative must sign a real property deed in the presence of a notary. The problem is that someone can pose as the property owner and sign the deed in front of an innocent (or colluding) notary. Other scammers may use a completely made-up name or identify themselves as the owner's personal representative. Regardless of the method, the result is a transfer of property made possible by false documentation or identity theft.
A recent AP article highlighted several examples of real estate fraud, would the blockchain fix these?
In the area of mortgage fraud described earlier, ChromaWay is working with the industry to leverage the blockchain to provide data provenance throughout the mortgage supply chain. This will greatly improve the asset quality and performance of loans. For example, in today’s mortgage market there are information asymmetries because rating agencies and investors looking at the mortgage-backed securities (MBS) can’t be sure of the underlying quality (i.e., property evaluation, underwriting, documentation) of individual loans comprising a pool. As noted above, the blockchain chain can make those processes much more transparent.
How will the blockchain mitigate deed fraud?
In the cases in San Diego and New York City cited by that AP article, the fraudsters used licensed professionals to notarize and file legal documents. Because county recorders have no basis to determine the authenticity of a submission other than the notarized documents, these types of fraud are relatively easy to perpetrate.
In the area of deed fraud, the blockchain will be especially helpful. Even the most rudimentary blockchain-based land registries would include digital "keys": (1) public keys associated with individual properties through an unambiguous identifier stored on the blockchain and (2) private keys assigned only to the owners of each individual property. The Land registry (e.g. a county recorder here in the US) would not be able to transfer a property without matching both the public key and the owner-provided private key.
Use of these digital “keys,” or cryptography in general, is a significant departure from current practice where notaries and paper-based documentation are used to verify and transfer ownership. But, while blockchain provides a faster, more secure way to verify submissions and facilitate transfers, a blockchain-based property registry is not wholly immune to fraud. For example, a thief could steal a property owner’s private key and authorize a transfer for themselves.
The CTO of ChromaWay, Alex Mizrahi, discussed this issue in a recent white paper on the subject. He recommends a hybrid approach (Figure 1) that requires digital “signatures” from both the land registry and the owner to execute a property transfer in addition to the associated digital keys. What’s important is that a blockchain would provide the framework to implement policies better protecting property ownership. For example, a blockchain protocol could require that a deed is not transferred without first automatically validating the parties against an FBI or local police database.
How would you explain the keys to someone with no experience in blockchain?
Something known as public key encryption has actually been around since the 1970’s. Think of a person who has two connected keys to a safe. The public key (known to all) is used to place a document in the safe, but only the matched private key (known only by the user) can unlock the safe and read the document. So, a public key is used to lock transmitted data (encryption) and a private key is used to unlock the data (decryption).
This key-pairing framework can also be used to create a digital signature which provides an extra layer of authentication, data integrity, and nonrepudiation - all of which are instrumental for blockchain-based transactions. A digital signature can be understood as a hash code generated by combining a user’s private key with the data they wish to sign. The generated hash code or “signature” can then be used to verify the data, and vice versa. If the data is altered in even the slightest way, it will no longer match the signature and will show as invalid when checked. In our forged deed example, the land registry system would reject the deed for the same reason.
Digging deeper, can you explain how the immutability of blockchain does not prohibit appropriate/authorized changes from being made down the line?
I know that some industry observers have raised concerns that if an incorrect or fraudulent transfer of property is performed, the transfer would be “locked” into the blockchain as an immutable record. For the reasons described above, this scenario seems highly unlikely. But, if fraud does occur, a block showing improper ownership can always be superseded by the addition of a block reflecting the correct ownership as long as the consensus and cryptographic requirements are met.
"Trustless" is a term often associated with the blockchain, can you explain how this concept pertains to real estate?
This is one of the strengths of the blockchain framework. As Kevin Werbach from the University of Pennsylvania has noted, “the new architecture of “trustless trust” makes it possible to trust the outputs of a system without trusting any actor within it.” A trustless system does not depend on the intentions of any party – whether arbitrary or malicious. In the real estate industry, the large number of actors and the pure complexity of transactions make it highly vulnerable to attack. For example, each individual mortgage is originated by a unique set of realtors, brokers, appraisers, and other third party service providers. This presents an enormous challenge to lenders, investors, and land registries with regard to the veracity of the property and mortgage asset. The use of distributed ledgers, cryptography smart contracts, and consensus protocols – key components of the blockchain’s trustless approach – can result in a more trusted and valuable real estate system.
Todd Miller, ChromaWay’s US representative, can be reached at email@example.com