Blockchain Applications in Real Estate Finance: Mortgage...

Blockchain Applications in Real Estate

Finance: Mortgage Origination,

Securitization and Servicing

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TUESDAY, JUNE 19, 2018

Presenting a live 90-minute webinar with interactive Q&A

Jason A. Nagi, Shareholder, Polsinelli, New York

Ron Quaranta, Chairman, Wall Street Blockchain Alliance, New York

Timothy Willis, Managing Director, RiskSpan, Washington, D.C.

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Polsinelli PC © 2018Polsinelli PC © 2018

Blockchain Applications in Real Estate Finance: Mortgage Origination, Securitization and Servicing—a Strafford Webinar

June 19, 2018

Polsinelli PC © 2018

Panelists

Jason A. Nagi, [email protected]: @nagijason

Polsinelli, NY

Moderator

Ron [email protected]

Twitter: @ronqmanWall Street Blockchain Alliance

Panelist

Timothy [email protected]: @RiskSpan

RiskSpan

Panelist

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What is Blockchain?

▪ Public accounting of transactions

▪ Verified

▪ Replicated

▪ Maintained on unaffiliated individual computers, or “nodes”

▪ Connected to form a

network

▪ Secured by cryptography

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Definition and Origins

A blockchain is just a file on computer(s) that contain ‘blocks’

Blocks in a chain

=pages in a

book

Each block references the previous block using a ‘fingerprint’

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Blockchain “Fingerprints”

These “fingerprints” are cryptographically encrypted data

(hashes), uniquely derived from the block’s contents.

Source: Bits on Blocks 9

https://bitsonblocks.net/2016/02/01/a-gentle-introduction-to-smart-contracts/


DLT Recording Process

▪ New data approved by nodes

▪ Time-stamped

▪ Recorded on a block

▪ New block is linked to the prior block

Illustration: Mark Montgomery

Immutability

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Public Key Encryption

▪ Create a public-facing, anonymous address

▪ Matching private key given to owner/ addressee

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Benefits of Blockchain

✓The network and nodes take the place of an intermediary

✓No one entity needed to oversee transactions

✓No one entity to maintain records

✓Removal of Middlemen

✓Likely effect, reduction in costs, not elimination of roles

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Public v. Permissioned Ledgers

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Interoperability

▪ Permits nodes of one blockchain from interacting with nodes of another blockchain

▪ Allows for multi-chain trades

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Smart Contracts

▪ Automated contract

▪ Does not require human involvement in order for an exchange to take place

▪ Does not require trust

▪ Can link bank accounts to smart contract applications for payments:

• By borrowers

• To bondholders

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Business Logic with Smart Contracts

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Growing Awareness of Smart Contracts

Smart contracts in use today relate to:

▪ Insurance

– B3i Blockchain shipping project

▪ Bonds

– Daimler issued a €100 bond in June 2017

– Proof of concepts for bond offerings created by

• Hyperledger

• IBM

• UBS

▪ Lending Platforms

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An holistic approach: A platform that integrates business specific smart contracts, proprietary middleware technology and machine learning algorithms to verify data and achieve consensus required to manage a securitized asset through its life cycle.

Data Adapters

Extract legacy data from paper-based documents and other sources using machine learning

Algorithms and machine learning to verify data and achieve consensus

Smart Contracts

Verification Algorithm

Workflow Automation

Executable smart contracts derived from data and used to execute transaction

DLT Software:

Hyperledger

Ethereum

R3

Implement workflow automation through embedded data verification tools that support the deal life cycle.

Users can implement automation tools “off-chain” realizing immediate process efficiencies and enhanced ROI.

Smart Link Lab Platform

RiskSpan, Smartlink Labs © 2018 18


Investor

Broker/ Dealer

Issuer Accounting Firm

Paying Agent

Loan Origination

Shared, replicated, permissioned

Investor

Broker/ Dealer

Issuer

Accountant

Paying Agent

Loan Origination

Deal Issuance Current State Deal Issuance Blockchain Target State

… Inefficient and expensive … Streamlined, transparent process

Structured Finance:no material process changes in 30 years

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Investors

Broker/Dealer

Issuer

CPA Firm

Verify model scenarios &

“tie-out”

Smart contract (python model)

Prosupp & disclosures generated & ready for

review

Blockchain permissioned for servicing & paymentsPost prelim model

results to permissioned blockchain

Smart contract to remit funds

Structured Transactions



Scanned Paper Documents

Scanned Documents

PDF Forms

Input/ Loan Doc Data Extraction

RS Machine Learning Algorithm

Block Formation Consensus and Verification

Identity

Property

Finance

Credit

Extracted data records

Original documents

Loan terms and conditions smart contract

API Calls for automated consensus

ImmutableSecureVerifiedDLT

LOAN LOAN LOAN

Immutable – Secure – Verified - DLT

• Smart contract associated with each loan generates expected payment

• Periodic (re)verification of information can be triggered • Servicer updated are attached to Loan blocks• DLT can be queried to generate investor reports

Servicing

Document Custodian and Due Diligence – Target State



Loss Mitigation & Claims Management

1. Process Borrower Payments2. Identify Delinquent Borrowers3. Document Borrower Contact

4. Advance P&I5. Advance Property Taxes6. Advance HOA Fees7. Advance Property Insurance

8. Monthly Delinquency Reporting9. Evaluate Retention Workout Options10. Property Inspections, if required11. Notice of Default to Mortgage Insurers

11. Monitor Bankruptcy Filing12. Evaluate Liquidation Workout Options13. Initiate Foreclosure Process

15. Acquire REO Property16. Maintain REO Property17. Mortgage Insurance Claim18. Liquidate Property

Smart Contracts

Distributed Ledger

• Monitor Advances• Trigger Payments• Document Payment Receipts

• Order Property Inspection• Submit Notice of Default• Monitor Loss Mitigation

Timelines

• Trigger Foreclosure Process• Monitor Attorney Fees• Monitor Foreclosure

Timelines

• Trigger Property Preservation• Monitor Property Preservation Fees• Trigger Mortgage Insurance Claim

• Natural Language Processing of Servicing Notes

• Reconcile Timelines• Reconcile Expenses

Conceptual Blockchain Design



Dharma.io Lending Platforms

A “Tokenized Lending Platform”

Source: Dharma.io 23


Real Estate Transactions

▪ Partnering with Burlington VT to develop a blockchain to record title;

▪ First Blockchain purchase and sale of real property in Ukraine, September2017

Source: Propy 24


Title Records and Tokenization of Real Estate

▪ Blockchain is Ideal for title records

▪ Planned by

– Republic of Georgia

– Honduras

▪ Ideal to prevent corruption

▪ Avoid inability to prove ownership based on localized natural disaster

▪ Significant barriers in the US

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Contact Info

Jason A. Nagi, [email protected]: @nagijason

Polsinelli, NY

Moderator

Ron [email protected]

Twitter: @ronqmanWall Street Blockchain Alliance

Panelist

Timothy [email protected]: @RiskSpan

RiskSpan

Panelist

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About This Publication

▪ Polsinelli provides this material for educational purposes only.

▪ The material provided herein is general and is not intended to be legal advice.

▪ Nothing herein should be relied upon or used without consulting a lawyer to consider your specificcircumstances, possible changes to applicable laws, rules and regulations and other legal issues.

▪ Receipt of this material does not establish an attorney-client relationship.

▪ Polsinelli is very proud of the results we obtain for our clients, but you should know that past results donot guarantee future results; that every case is different and must be judged on its own merits; and thatthe choice of a lawyer is an important decision and should not be based solely upon advertisements.

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Blockchain Applications in Real Estate Finance: Mortgage...

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