Blockchain, Smart Contracts and those Pesky Old Liens
In order to revolutionize real estate transactions, understanding that titles have to be in a blockchain first for any of this to work, those working on blockchain and smart contract technology for real estate might consider focusing more on finding the current pain points and problems in real estate title and closing. How we transfer raw fee title ownership from one party to the next is the easy part. There are a boatload of other title issues that could benefit from blockchain and smart contracts that few are talking about. Finding cures for these ills would go a long way in engaging the real estate, mortgage lending, and title communities in blockchain and smart contracts. Here’s one of those ills for starters, old liens.
I frequently harken back to a day in the mid-1980s when a Japanese client pointed and laughed at the “El” in Chicago, and also told me that the USA was the most difficult place to buy real estate. A lot of what he referred to in detailing his claim had to do with contract negotiation and general mistrust in US business not experienced in mid-late 20th century Japan, but he also referred to the title clearance and closing process.
He noted, among other things, that the title commitments we ordered showed all sorts of interests in the land other than fee title ownership, including easements, covenants, and old liens. All these years later, I find the title exceptions that most frustrate customers are old liens, those old mortgages and judgment liens attaching, not to the interest of the current owner, but past owners. While most old liens on prior owner’s land interests are paid, many have not been formally released by recording a release in the county recorder’s office. Unreleased liens, even if paid, are still going to show up on title.
It can be difficult to clear old liens. The lien holder may have sent a release to the prior owner who didn’t know to record it, or the lien holder may not have bothered issuing the release. Mortgage liens are often assigned to new companies in a series of unrecorded assignments (and MERS never really cured that problem), or the original mortgagee has gone out of business, and no one has kept track of the series of bank or mortgage company takeovers that affect mortgage ownership. To complicate matters even more, developers often sign different notes and mortgages for various stages of construction, and together with the ever-changing lenders, aren’t always carefully keeping track of which note belonged to which mortgage and what exactly was paid off or when. Non-mortgage lien holders, frequently judgment creditors, can be long gone, dead, out of business, and unavailable to release their liens.
Title companies may insure some of these old liens for a new buyer by agreeing to take on the risk, or requiring a title indemnity bond, but that would only cover the relatively small or provably paid liens.
Larger liens, and those where payment is uncertain require other forms of indemnification. Title companies have created a network of sorts to waive and insure old liens using the time-consuming issuance of “hold harmless letters” for each title subject to old liens each time the land is sold. More recently, title companies have dispensed with the actual letters instead using “inter-title company hold harmless agreements.” Under these letters and agreements, the prior title company may insure the new title company’s insured buyer over a lien if the owner/seller can present the old title insurance policy, free and clear of the old lien. However, land owners don’t always keep their title policies, and the large title company underwriters often stick to their 7-year records retention policies claiming they don’t have a copy of the old policy. An owner can be left without the insurance protection they purchased (or was purchased for them in some jurisdictions), and stuck with land subject to an old lien for which they never contracted. (I still wonder if that’s “bad faith claims handling” given that many of these title underwriters save and use old title reports as starter files for future titles.)
Blockchain and smart contracts in mortgage lending, and payment of other types of liens, can save title officers and their customers hours they current spend trying to clear old liens. Database technology probably could do the same thing, but with centralized rather than distributed control.
With this technology, a lien could become a smart contract, executing automatically as the parties behave as they’re supposed to under the terms and code of the smart contract. Payments would be applied to the mortgage or other type of lien instantaneously as they are made, and final payment would instantaneously trigger an automatic “release,” whatever that will eventually look like under the new system. There would be no need to track down and record releases, or issue hold harmless letters, or dig around for old title policies. Once the mortgage or lien is paid, the smart contract is fully executed and complete. To effect the lien release on the land title, the terminated lien smart contract would need to notify the smart contract containing the current status of title of its new released status. Lien assignments between lenders or other types of creditors could be handled similarly through smart contracts.
Creating a clear title, ready to move forward and not constantly backward, on each transfer would be transformative for the industry, increasing the speed of closing and reducing headaches for sellers, buyers, lenders, brokers and attorneys. After that’s accomplished, we could start working on bringing American commuter rail into the 21st century so the international clients won’t point and laugh at our trains.