Today marks the 15th anniversary of the collapse of Lehman Brothers. The great financial crisis (GFC) revealed a defective supply chain, metrics unable to assess local risk and markets incapable of answering Ben Bernanke’s defining question – “what’s this stuff worth?”
The need was understood long before the GFC and 25 years of development has created a solution set. Moving from nationalization to an industry digital housing platform requires 10 essential components, including:
- Authentication: Identity is a control point in any digital interaction. The capability to “identity proof” the participants in a complex, multi-party transaction is fundamental to establishing trust, reducing fraud and removing friction between “relying parties.” The capability to authenticate, issue and revoke digital credentials is central to controlling access, verifying rights and accepting content from supply chain partners.
- Authorization: A digital loan file of record accessed by a broad range of trusted identities from borrowers to lenders to investors requires a permission structure. What functions are individuals and organizations allowed to perform, including viewing, editing, copying, exchanging and approving? The capability to enforce these rights can eliminate errors and rework. The result should be collapsing costs and cycle times, improving quality, reducing repurchase risk and certifying that a loan, and its related assets, are “Fit 4 Sale.”
- Non-Repudiation: E-sign became federal law in 2000 but digital signatures are only a subset of the integrity requirement. Investors require assurance that a file, note or instrument reflects the verifiable intentions of the committed parties. Sensitive content must be protected in motion over networks and at rest within repositories. Technologies like encryption help deliver certainty that content has not been tampered with.
- Validation: Mortgage is a manufacturing process, and its products are dependent on accurate information. Data is imported from multiple sources including credit agencies, public records aggregators, appraisers, inspectors, title and insurance firms and Realtors. How do we know that the data is correct, can the source be verified, does it meet quality standards and can compliance with pricing guidelines be guaranteed?
- Federation: Integrating the fragmented, localized and diverse housing ecosystem is the major challenge for any network delivering content from trusted sources. Standard agreements define shared responsibilities and what happens when mistakes happen. These policy considerations, enforced by technology and legal conventions, are essential for interoperability among supply chains and between competing platforms.
- Registration: A golden record of who owns the asset is the foundation of any commercial trading system. Improving the ability of MERS to verify ownership required ICE to invest capital and time. Extending the reach of a shared network to county recording organizations was another necessary platform pre-condition.
- Transactions: Platforms are “plug and play” once federated policies are widely implemented. Matching and clearing trades in open exchanges for multiple asset classes is a core ICE capability. The Ellie Mae acquisition provided a critical mass of mortgage lending to begin the process of evolving to network-based operations.
- Compensation: A servicing system that touches the consumer every month can be extended to all the participants in the original transaction. Payments provide the end points of the ad-hoc networks that characterize real estate. As every consumer facing commercial platform will attest – payments are the prize.
- Information: The listing is the catalytic event and a system for compiling spot market data is “on platform.”
- Monetization: Platform integration must be supported by a business architecture that aligns incentives.
The DC3 platform launched in 1937 featured five components that had to be invented to make commercial air travel possible. Apple’s iPhone introduced in 2007 integrated 12 components and changed the world. The economics of the Housing Capital Cloud will favor first movers and early adopters. At last, a private sector response to the GFC.
Stuart McFarland is the former EVP Operations and CFO at Fannie Mae, EVP General Manager at GE Capital Mortgage Services, and CEO at GE Capital Asset Management.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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