TitleToken: The transformation of title insurance: How blockchain technology and tokenization will change the business of title insurance in the future
v1.0 — June 2019
By: Wes Williams, ESQ. (VP of Title), Sam Tannian-Reynolds (COO), Nathan Wosnack (Founder & CEO)
Title insurance has existed for over a century. Even to this day most consumers of title insurance have no clue what it is or why it is even important to obtain. They only know that their real estate agent or mortgage lender will insist they purchase it when buying or refinancing a home.
Before title insurance was even invented, purchasers of real estate solely bore the responsibility for ensuring the validity of title to the property held by the seller. Should title later be deemed invalid or found to be fraudulent, the buyer’s investment would be lost.
While title insurance currently plays a major role in the real estate process here in the US, the way title insurance is marketed and sold will ultimately change as a result of blockchain and tokenization technologies.
LAND RECORDING V. LAND REGISTRATION
The reason title insurance even exists in the first place is largely due to the type of land titling system adopted in a respective jurisdiction, of which there are two. Land recording, sometimes referred to as a deeds-based system, and land registration or Torrens system.
Under the land recording system every time a transaction involving the land takes place, there is a duty placed upon the parties to record the transfer document with a local government run recorder office located in the jurisdiction, typically the county, in which the property is located.
The county office thereupon indexes the instrument, typically by the name of the grantor and grantee, they then photograph the document so members of the public can search, examine and create a chain of title to the property.
Deeds based systems are rife for abuse and fraud. An unscrupulous grantor could sell their property to multiple grantees. The only way for a purchaser of real estate to avail themselves of protections afforded to them under the law is to record their deed in compliance with their respective state’s recording statutes.
It is because of these failures in the system that the need for title insurance arose. Purchasers of real estate need assurances that they received clear title to the property they just bought, and that a thorough search of the public records was undertaken beforehand to confirm the seller’s ownership, in addition to the existence of any liens or encumbrances that affect title to the property.
Before title insurance companies agree to insure a purchase or refinance, they conduct a title search of the public records. Shortly after execution of a real estate contract and escrow is opened, a title company will undertake a search of the public records looking for title issues. A title search sometimes involves a review of land records extending all the way back to a patent deed.
More often than not a search will reveal issues with the title, such as prior liens, judgements, etc. which a title insurance company will undertake to cure prior to closing in order to pass good title to the buyer and ultimately issue the buyer an owner’s policy of title insurance. A similar process is undertaken by a title company when asked to issue a mortgage policy to a lender.
The value proposition for title insurance companies in deeds-based systems are obvious. Because there is a potential for fraud in the system, title insurance policies provide owners and lenders assurance that title is as represented on the policy. Should the title be different, and the insured suffers a loss, a title insurance would have certain obligations to the insured under the policy. One obligation would be to defend the insured’s interest on the chance that someone claims a superior interest to that of the insured. In other words, the insured owner under the policy would look to the title insurance company to subsidize the cost of the defense rather than come out of pocket from those expenses.
Because of the fragmented, cumbersome and often times archaic way the various county offices would record and index their records, title insurance companies created their own parallel system that mirrored the county land record system; however title companies organized this data in a more efficient way to help streamline the search and exam process. These title company owned systems are often referred to as title plants.
Most title plant systems in existence today are digital. While they are set up to mirror the information contained at the county recorder or clerk’s office, the functionality of these databases are more streamlined and pulls data from various other county offices and makes it easier to compile a comprehensive abstract of title.
LAND REGISTRATION/TORRENS SYSTEM
Originally introduced in South Australia in 1858–60 by Sir Richard Torrens, an Irish emigrant to Australia, who devised a system for registering land titles based on the method used to record ownership interests in ships as used by the British Ship Registry.
The concept is simple, all land alienated from a state was recorded, as well as other titles could be registered voluntarily. As soon as a transfer was accomplished the applicant brought the deeds to land registry, including any applicable plats or surveys, in addition to a statement from an ‘examiner of titles’ evidencing the title. Upon approval, the title was recorded, and no further action was required to establish a root of title.
The registry established a record of title and a copy of that record was provided to the owner. The system is based on the principle that title to a parcel of land cannot pass, and no encumbrance can be enforced, unless the same is recorded in the land register; title that is registered is then deemed absolute and indefeasible, in other words it is guaranteed by the State.
A Torrens system provides for the registration of land titles, as distinguished from a deeds based type system that merely provides for the recordation of deeds and documents that transfer, as well as those that encumber title to land, in order to provide notice to any third parties who may take an interest in the land. Under a Torrens system the actual transfer of title is effectuated by registration, i.e. the old certificate is cancelled, and a new certificate is issued in the name of the new owner.
A Torrens certificate, sometimes referred to as a Certificate of Title, is issued to the new property owner by the Registrar of Titles. A Torrens certificate includes the name of the new owner, as well as all liens, court orders, easements, restrictions, encumbrances, leases and rights and claims of third parties that affect title to the land. Therefore, any interest not noted on the Torrens certificate is not considered binding on a bona fide purchaser of the registered land.
TITLE TOKEN AND MARKETPLACE
Title insurance has traditionally been marketed and sold to real estate agents and mortgage professionals. The reason being is that title insurance is a very obscure product. Most home buyers aren’t sophisticated enough to take the time to understand what the product is or why it’s even valuable to obtain. Therefore, consumers of the title insurance products typically rely on their agent or broker to select which title company to use on their transaction.
As discussed, title insurance as a business model requires searching the public land records, reviewing the chain of title and preparing an abstract of title based upon that research to determine their ability to insure a particular parcel of land. And due to inefficiencies with county land records offices, title companies have resorted to building their own title plant systems which mirror the county land record offices for purposes of streamlining the process.
To streamline the process even more, title companies have cooperated behind the scenes, sharing data with one another. They share amongst each other what the industry has termed “starters”. Starters are prior commitments and policies of title insurance issued by a company and are used as a starting point during the title searching process. Without the benefit of a starter a title company would typically be required to search the property all the way back to patent deed and then come forward to determine what interests, liens, easements, etc. have been conveyed by the owner during their period of ownership.
A policy, used as a starter would contain such information such as estate, ownership, as well as any recorded liens, easements, restrictions, encumbrances, etc., reflected on Schedules A and B of the policy.
What we are proposing is the creation of a Title Token. One that would function like a Torrens certificate. The Title Token would contain ownership and estate information, as well as recorded liens, easements, restrictions, encumbrances, etc. reflected on Schedule A and B of the policy. Additional data contained on the Title Token would be the current assessed and market value information, copies of all recorded documents which affect title to the property, including vesting deed, in addition to all plat maps, surveys and plotted easements, if any.
The basis for creating the Title Token would be a property owner’s owner policy of title insurance. The Title Token holder will then host and market their tokens on Ubitquity’s marketplace. As a Title Token holder, one can share their title information directly to title insurance companies who will review the public record data and information contained on the Title Token and will then make a determination as to whether they will insure a given property.
Title companies can not only compete with one another, they can determine what risk percentage they will allocate and cooperate with other title insurers by agreeing to co-insure a property thus allocating and reducing their exposure risk.
The main goal is for title insurers to issue one master policy and issue update endorsements as new data is fed into the title token from the county recorder offices, thus allowing each property owner to create their own title plant that continuously gets updated and insured.
Ubitquity’s platform will also include a reputation score that is given to title companies, appraisers, recorder offices and other data providers to assure they feed into the token the most accurate data available.
Once created, insured and maintained, a Title Token will become a genesis block for title as of the date of the master policy and update endorsements. The backing of the title companies as well as the system will provide a solid foundation upon which to continue to maintain this new system in an open and transparent way.
The benefits of the system will allow for a reduction in the cost of title insurance premiums overall, and the savings to title insurers by reducing the need to maintain a large staff of title searchers to research property. Additionally, title insurers can allocate and apportion risk by agreeing to co-insure with other title companies.
It is anticipated that Title Tokens will also become a bearer asset which can then be transferred similar to a Torrens certificate would be.
Ubitquity believes that blockchain and tokenization technology can bring about a new way to market and sell title insurance. One that is more consumer direct and consumer driven. All this while at the same time eliminate the need for title companies to maintain a title plant, and possibly staff to search property. The Ubitquity team is building this ecosystem in cooperation with the title industry to make this a reality.
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