Will The Power Of Blockchain Mean The End Of Title Insurance Companies ?
Forbes Councils Member
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.
How will any of this change? It begins with the blockchain.
The Title Commitment And The Blockchain
More than 25% of title reports detail some type of defect to the title, according to the American Land Title Association. Blockchain enables real-time access to ownership information and will lower the costs to obtain an abstract of title. Once a global registry exists, downloading the entire chain of a property’s ownership records will take a few seconds for very little cost. Sounds amazing, right?
• Closing Process And Blockchain
The real estate industry is finally embracing e-closings. Banks are starting to adopt technologies that harness their documentation into e-docs, states across the country are quickly enacting legislation to provide for e-notarization and more than 1,700 of the roughly 3,000 counties in the United States have created an e-recording platform. Once counties begin to accept digital signatures instead of wet signatures, the steps to acquire real estate can become amazingly fluid and simple.
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.
• Record Keeping And Blockchain
Blockchain technology will certainly eliminate most fraud and tampering that exists with ownership records located at a county clerk’s office and convert land records to a distributed ledger. Every record is stamped by the trusted parties when updated to the chain. Each subsequent entry stands upon the validity of the prior entry creating new records. There is true dependency from one record to the next record. The consensus algorithm of a blockchain will prevent bad information from disrupting the chain and make tampering of records more easily detectable and avoidable. A distributed “immutable” ledger equals little fear of fraud, and an increase in trust — a massive upgrade from our current county ledger.
Title Insurance Industry at Risk?
The inner blockchain world will convince you that the title insurance business is at risk of survival. Many believe that intermediary businesses are all on their last lifeline. Blockchain technology will inevitably connect the parties of a real estate transaction and eliminate many of the services a real estate agent or title officer provides. But to say that we in the profession are a dying breed is inaccurate and even absurd. Will the role of intermediary services be redefined? Absolutely. Consider the everlasting needs and remaining gaps:
• Title Commitment/Policy
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.
• Record Keeping
Unfortunately, there are still over 1,200 counties not yet digitally recording. Only a handful of states have passed legislation to allow for electronic notarization. And even more importantly, only a handful of counties throughout the country are allowing digital stamps to represent signatures for a recordable document such as a deed or mortgage. Not to mention that the speed upon which local county clerks move to adopt new technology is frustratingly slow. So that frictionless closing that I described above? Yes, that is a long long way from now.
• The Closing
Certainly, a smart contract can create rules and procedures to finalize tax prorations, rent prorations and escrow holdbacks pursuant to final inspections. However, who is going to be at this “digital closing table” to mediate between parties in regards to disputes still pending, authenticate a payoff statement from a private creditor or lienholder, obtain a payoff from material men, pay-off all utility bills or verify a power of attorney? Sorry Mr. Blockchain, Title has you again.
Title companies are not like many other intermediaries that very well may face extinction. A title attorney or closer is needed in many different scenarios to complete the transaction. Our roles will change. The industry as a whole will be creative in its adaptation of the utilization of the blockchain, amending our services based on the clientele’s future needs. It is true that the fundamental trust in record keeping may be garnered by the blockchain, but today’s title insurance company is not going anywhere. We will remain necessary and serve in many different capacities. Blockchain will bring great efficiencies, cost reductions and simplicities to our industry, but it will only supplement the hands-on expertise of a title insurance company.