Transcription:
Julian Hebron: (
All right. Hello everyone, and welcome to this talk, where we're going to cut right to the chase on blockchain reality, across originations, servicing and securitization. I'm your host, Julian Hebron of The Basis Point. We're a sales and strategy consultancy for banks, lenders and fintechs, and I got three of the best today here to run this down. First, we've got Dan Wallace, who's head of lending at Figure, which has proven critical blockchain concepts in HELOC and loans, and is now moving into first-lien mortgage use cases, which we're going to talk about today. So, hey ,Dan, just say, "Hey," so we can hear ya.
Dan Wallace: (
Hello.
Julian Hebron: (
All right. Next up, Dan Sogorka. He's the CEO of Sagent, which is a fintech powering over a trillion and a half in outstanding loan servicing for top banks and lenders and a veteran of scale disruption innovation in both originations and servicing. So hey, Dan, mic check for you as well.
Dan Sogorka: (
Hey folks.
Julian Hebron: (
Hey. And last we've got Rajesh Bhat. He's the CEO and co-founder of Roostify,, pioneer in the POS space that powers the digital experiences for consumers, lenders on the origination side, and definitely a leader in the nuance it takes to get this right. So, hey, Rajesh, are you there? Can you hear us?
Rajesh Bhat: (
Yes, sir.
Julian Hebron: (
All right.
Rajesh Bhat: (
Good morning, everyone.
Julian Hebron: (
Cool. All right, so here's what I'm going to do. I'm going to just quickly set up for us, and then we're going to jump right in. We've got a lot to do in 30 minutes. It's a deep topic, but we are going to do it in plain English for everybody. So, the whole idea today is to make blockchain real for everybody. And in mortgage, we all say trust, but verify. That's the mantra of the whole space, which means underwriting, reunderwriting, auditing repeatedly from originations through securitization. In blockchain, we say replace trust with truth, which actually opposes that previous statement. That just means a truly digital-native asset, like a loan, that lives on a decentralized immutable database from origination through securitization, which then eliminates the need to reunderwrite and audit repeatedly. That's where the cost savings come from. So most of us in mortgage can wrap our heads around this, but get stuck on — okay, great. But how can this possibly work if you don't have originator, servicers, warehouse, regulators, GSEs, investors, title consumers, etc., — all on board, all at once. That's the focus for today? So if guys are ready, we're going to go pretty quick, to make sure we can get it all in 30 minutes. And we're going to start with blockchains for HELCO, what figure and Sagent are doing together and then consumer experience overall.
Julian Hebron: (
So Rajesh, first question for you, how do you define a truly digital-native loan? And how are you helping make loans more,truly digital? And you can please include this sort of why does blockchain matter in your answer?
Rajesh Bhat: (
Sure. So I think there's sometimes a misconception about what constitutes digital. It oftentimes gets conflated with the idea of being consumer self-service, but, but ultimately digital is enabling different personas to be able to take information that's offline or in other systems and centralize it into a single place and have that data available to drive behaviors, either consumer behavior or banker behavior in the context of mortgage. And so what we've seen over the last, I would say, five to six years, is really one, a proliferation of digital capabilities in our space, but we've also seen the extension of what is being digitized from where we were probably five, six years ago, which was the digitization of a credit application, to where we are today, which is the digitization of workflow and as a result of the digitization of workflow, the ability to bring in more data into the origination experience earlier in the process. And that's important because it's opening up the opportunity for more data being available earlier in the process to be able to optimize the process altogether. And you had suggested we don't use big words, so I'll try to stick to two-syllable words from here on out. So that's, as we think about the opportunity that it opens up in the context of moving from trust-but-verify to truth-over-trust. As, as you have the ability to go end to end digitally, you then have the opportunity to bring in more data and have that data have an audit trail around it, if you want. So, today you have the ability to bring in data into, let's say a credit application from a bank account, or from, a trusted system within the environment that that can prepopulate an application.
Rajesh Bhat: (
But then leveraging capabilities, such as what we've recently brought to market, you can take data, pull it out of verified documents at a very high confidence level to, in fact, just expand the dataset, and you have a larger aggregated dataset to work with earlier in the process. So as we have more trusted data available to the loan officer or to processors or even underwriters early in the process, it changes how we think about the decisioning process altogether. And so, when we look at the ability to share not just the data, but the context around the data, with not just the consumer and the bankers, but third parties, it opens up the opportunity to create greater fungibility potentially in the secondary market, which is why blockchain's exciting. I think Dan's going to speak, Dan Wallace is going to speak more about this, but there's an opportunity obviously to create more evidence of truth, if you want, on the blockchain. But whether it's blockchain or another protocol, what's being brought forward is the demand, the need to be able to create a standard that facilitates greater interoperability between different systems that everyone can align on to create more trust in this ability to aggregate data from these trusted sources earlier in the process.
Rajesh Bhat: (
And then the next step is to be able to do what blockchain does very well, which is to facilitate intraparty settlements. And then I'll stop talking and let someone more knowledgeable about that speak.
Julian Hebron: (
So, all right, Dan Wallace, I'm going to bring you in and let's go deeper down. We'll keep going deeper and deeper. So with that said, Dan, what I want to do is have you talk about Figure kind of proving all of this with HELOC and consumer loans. I know you've done it with consumer loans, but let's just stick with HELOC because it's related to mortgage, right? And just take us through it. You've been doing this in 2020 and 2021. You have use cases. You understand how it wrings cost out of the system. And just maybe, if you would, talk about that, because you do actually go — it's replacing trust with truth rather than trust with verify on those assets. So let's talk about that because it starts to make the case for first lien, which we'll do next.
Dan Wallace: (
Sure. Thank you. And to kind of continue on, Rajesh was saying is that, for our HELOC product — and the HELOC admittedly is a simpler product to originate than first-lien mortgages. But what we've done on our HELOC originations is link the source data that's verified source data to the underwriting and validation of that data, meaning that when we are grabbing consumer data, it is directly from source similar to how a day-one certainty would work. The source data is signed by source, validated by source. And then we have smart contracts on the underwriting side that validate the source data and that the data being used meets the underwriting criteria. So this, this obviously enables us to eliminate and minimize post-closing QC, reunderwriting, packet audit when it comes to sale of loans, securitization of loans, and that's where the cost savings we've as we've documented 117 basis points comes in.
Dan Wallace: (
So it starts with the source data data coming from Experian, coming from CoreLogic coming from other sources. That data is signed by source. Um, the, the data is read into algorithms for underwriting, and the data is validated. And then on a post closed basis, we have validation reports that either rating agencies, investors, aggregators, other loan participants, servicers can look at validation reports and determine that that the underwriting criteria has been met and that the source, the data has been signed by source and come from source. And so the savings that we've realized has been across the board, including origination, servicing, the financing and securitization, and a lot of it has to do with reduced packet audit, reduced QC, reduced cost of servicing boarding, and even at the servicing, performing servicing stage.
Julian Hebron: (
And we're going to keep going down that Dan Wallace, but first I want to go to Dan Sogorka and just pause for a sec on servicing and tie together Sagent and Figure for a second. So in the third quarter, just before the fourth quarter, Sagent and Figure, Dan Sogorka announced this two-tier relationship, where Sagent would power servicing for Figure, and the two firms would collaborate on software innovation with the Provenance blockchain, which is also, it's a public blockchain founded by the Figure founding team. But can you just kind of break down the Sagent-Figure relationship a little bit?
Dan Sogorka: (
Yeah, sure. So, it's really a great partnership between two, I would say, two entities with very deep subject-matter expertise and a desire to kind of change the paradigm at a high level. So we're kind of working on two fronts. One is how do we create, together, really great servicing software that really gets at the two components that need to evolve dramatically. One is the consumer and the consumer engagement as a part of that. And the other is kind of the servicing user and their engagement to the software, right? You can't really get a high benefit to one without addressing the other. And then second to that is the blockchain component, right? And we think about —at least I do — with our business is kind of like, you have today, what are we doing today? What are we doin that's going to impact three to five years? And then what are we doing that's going to impact 10 years plus. And I think this blockchain thing's probably in the latter end of three to five at scale. But really what do things look like 10 years from now? So we're working very closely with them on all of those areas, and improving out blockchain at scale for mortgage.
Julian Hebron: (
Got it. Yeah. Thank you. And we're going to see how that comes together. But Dan Wallace, I don't know if you want to add anything quickly, and maybe just one more note on how you kind of see the role of servicing in the Figure Provenance vision.
Dan Wallace: (
Servicing, to complete the picture, understanding what's happening kind of post close with the consumer in terms of payments, the servicing is vitally important. To have a complete picture of the balance, of, possibly the status of the consumer having servicing on chain is important, because it provides real-time remittance and real-time clarity. The example that we quote is during COVID, that was extremely important in that we were able to understand on a daily basis what forbearances were looking like and what consumer patterns or behaviors were, such that we weren't waiting 30, 45 or 60 days for a remittance report to come out, to find out what happened a month or two ago. And so, real-time remittance, real-time reporting is important. It'll be important. I think that investors will embrace it. And having the servicing data on chain, such that we have updated balances, and we know exactly what the customer balance is. And then, when we get into eNotes and the ability to trade or transact mortgages in real time, that servicing data — real-time servicing data — will also be vitally important.
Julian Hebron: (
And I'm going to follow up with you in a bit here on the eNote part, but I just want to underline for everybody listening how important that part is about real-time remit on the servicing side and really across the chain. And what Dan Wallace is referring to is — thankfully it didn't turn out like '08 — but if everybody remembers March 2020, the capital markets freezing up, that's what he's referring to. At that time, Figure in its business activities wasn't subjected to some of that freezing. Is that is that a correct way of interpreting that?
Dan Wallace: (
Yes. Yes, we were able to relay to investors real-time information on a daily basis in terms of how our loans were performing and how our borrowers and customers were performing.
Julian Hebron: (
All right. So before we go down into the deeper dive on first-lien mortgages for blockchain in '22, just a quick hit from each. Dan now back to Dan Sogorka, then Rajesh for a word on what all this means for the consumer experience.
Dan Sogorka: (
Yeah. So we've been really vocal at Sagent about — this has to be about consumer first, right? Homeowner first. So I think when you start there, and you start peeling the onion on that, you have a couple of critical points along the way that you need to solve for: origination, boarding to servicing, refinance. Again, we've been very vocal that it's all one thing to the consumer, to the homeowner. They need to go through this life cycle, and it can't be all these disparate systems with different look and feels and drops along the way.
Dan Sogorka: (
So we're very focused on kind of the end-to-end experience from a consumer perspective. And again, in order to deliver that, you need to fix the servicer SaaS as well, right? And we think blockchain, and the things we're doing with Figure fit in as well, too, because if you think about anybody who wants a home, when your servicing's transferred, and now there's a new company that's sending you bills, and maybe the balance is different and you don't know why escrow changed. All of this can be fixed with this combination of things we're talking about. Focus on the consumer, make the servicer SaaS better, have a better blockchain-based backend that kind of manages the data
Julian Hebron: (
And Rajesh, quick hit, and then we'll move into into the depth on the first-lien stuff.
Rajesh Bhat: (
Yeah. So obviously, you know, everything we've done has been towards making the experience better, cheaper, faster for our customers and for the consumer as well. And, so in thinking about how blockchain facilitates this, or just any, any real standard on this is what we're talking about. This concept of this trusted data trail. As we create the right user experience, to be able to make the consumer feel comfortable, either consenting to provide this information or to initiating the sharing of information from trust in places themselves, then it becomes paramount that as that data is moved onto a standard data set like blockchain, that they can do more with it than they would be able to if it was just, you know, business as usual as it has been in the past.
Rajesh Bhat: (
And so, the value for the consumer is obviously driving to the right outcome more quickly, being able to go through an underwrite with greater efficacy and having that notion of speed to certainty. But then also, to Dan's point, being able, to onboard into the servicing experience more effectively. And then also, you know, what it sets up for is just greater liquidity for the consumer. So if they have the ability to move their loan more easily from one place to another, that's obviously advantageous for them. Obviously, it may not be for the banks, but then it really just makes them, it forces them to reimagine their portfolio retention strategy and to be a lot more efficient about it as well. And it gives the secondary markets, obviously, an opportunity to have much more insight into the consumer and to design experiences for the consumer that are really hyper personalized.
Rajesh Bhat: (
So, everything that Dan Wallace shared about the insight that they were able to provide to their investors on, just how consumers were performing in their behavior, there's, the activity of payments, but there's also a lot of metadata around that that really can inform what a marketing team for a company like Figure would do or any lender that's using one of these services as well. So, it sets up for, really driving for more real-time, hyper-personalized experiences, but it's really built on this idea that the consumers are trusting the whole system and the whole trail to be able to — at the outset — provide that information.
Julian Hebron: (
Thanks, Rajesh. And so, all right, now, here we go into the main part. So we got an audience question, that I'm going to use to transition here.
Julian Hebron: (
One of the audience members asked, "Can you comment on the Bacon Protocol and them offering industry first NFT mortgages?" So what that is is what they claim is giving homeowners the ability to exchange a lien on their property for an NFT that represents a portion of its value. When you put it like that, that's when you lose people in the mortgage industry, and you lose all the constituents that we all have to serve, including investors, GSEs, etc. So, today for the rest of this, we're going to talk about how we do real loans on the ground in a way that consumers, investors, secondary, everybody can understand. So Dan Wallace, you said that the key to first-lien success — you've proved it on HELOCs. You have nonagency investors on board for HELOCs, so you can originate on chain, service on chain, securitize on chain. And you have that infrastructure in place in the nonagency world. So now you're starting to move to first liens to demonstrate this in real life. And can you answer that and also integrate where those first liens are going to come from, and I think it's from this acquisition that you made recently. So can you just dive into that for a sec?
Dan Wallace: (
Sure. We are taking a structured approach to the continued adoption of blockchain. We are starting with nonagencies, specifically non-QM mortgages, first-lien mortgages for a couple of reasons. One is that's an incredible pain point. If we just kind of roll the clock back 18 or so months back to March and April of 2020, there was a point in time that non-QM mortgages — newly originated high-quality, non-QM mortgages — fell in price from 105 or 104 down to high 80s or low 90s. What that highlighted I think for a lot of — and there was also quite a shock to many of the mortgage REITs and other equities of various mortgage companies — I think what that highlighted to many originators is the fact that being able to move inventory quickly is a very important part of their origination models, minimizing how long a loan sits on a warehouse line.
Dan Wallace: (
It reduces equity capital. It reduces market risk and volatility. So we're starting with non-QM mortgages. We're going to talk about eNotes, but we're talking about originating non-QM mortgages in eNote form, and basically, registering those and controlling the eNote on blockchain. That enables the mortgages to trade instantaneously.
Dan Wallace: (
In terms of non-QM, we announced in August that Figure Lending was merging with Homebridge Mortgage. HomeBridge is a national lender that originates in excess of 25 billion of mortgages a year. They are a top non-QM and a top prime jumbo originator, as well as agency in terms of GSE and Ginne Mae mortgages. But through their non-QM originations is where we'll be starting the process. With eNotes, we're currently talking with institutional investors on that process. In terms of Homebridge's originations, they already have enough production to do — they've already done standalone securitizations. So there isn't really a volume issue. It's — so that's where we're starting. It's a very structured approach.
Dan Wallace: (
You know, our objective is to — like we've done on HELOCs and personal loans in terms of originating and selling all of our production on blockchain and securitizing, — we'll do the same with non-QM first-lien mortgages. And from there, we'll move and work with the other regulatory agencies on showing them kind of the proof of concept.
Julian Hebron: (
And I just want to underline for everybody here that — and Dan Wallace — tell me if I get this right. But it's not like you're just starting these conversations. You've already proven it to a bunch of these major Wall Street players on the HELOC side. So it's like, they're already onboard in terms of saying native Provenance originations coming through to securitization carries through to these first-lien discussions that you're having now. Is that a true statement?
Dan Wallace: (
Yes. Yeah. We've originated over 3 billion of HELOCs. We originate, and we sell all of our, HELOCs via the Provenance blockchain. So that's up and running. That's how the process currently works, including servicing on Provenance. And so this is a natural extension for us to move into the first-lien space, and we have our own direct-to-consumer mortgage originations. And then certainly, the HomeBridge transaction adds significant scale to this process.
Julian Hebron: (
Thank you, Dan Wallace. Now Dan Sogorka, I mean, this is super exciting on the origination side. It also has exciting implications for the increased portability of MSRs, but, servicers are definitely looking at this real regulatory world and the CFPB that's saying "Unprepared is unacceptable."
Julian Hebron: (
They have real-world stuff today to deal with. So how do you talk to them about this? Or are you just like, "Hey, we're going to prove the case over here with our Figure partner, and then we're going to come back and let you know that we're building the future for you too, while we're doing the rest of the servicing the way you need it done today." How do those conversations go?
Dan Sogorka: (
Yeah, great question. On one hand, transferability and visibility helps everybody, right? And we know it's a problem in the industry. So, everybody's excited on that front. On the other side, back to my statement earlier, one of the benefits of doing things at scale is that you have a lot of customers that have needs today, but also want to know that they're with the right partner going forward, that sees the future and is not going to let them get disintermediated by somebody else who comes on and takes advantage of technology that they don't, right? So, when we focus on the real issues right now around the consumer — everybody wants to say we need to take care of the consumer — performing nonperforming, everything needs to be really tight and, again, visible with the regulators, that's a no brainer. We have to spend a lot of time on that. But we do need to engage with them. And that's typically monthly or quarterly on what's coming next down the road. How are we managing our investments in both of those buckets and making sure that we're positioning for the future?
Dan Sogorka: (
And so everybody was really excited about the Figure partnership and the things that we do in that regard that help all of our constituents — consumers, servicers — solve the cost problem in servicing investors, right? As long as we're aligned and really trying to be great for all of our constituents, we're kind of doing the right thing and people see that.
Julian Hebron: (
Okay, so Dan Wallace, I want go to you on the eNote thing. We've got five minutes left. We're trying to squeeze a lot into a half hour. So, this is critical. The property is the most important part, and I like how you explain this. So if you get this right, you can actually make blockchain real. So can you just break it down a little bit for everyone?
Dan Wallace: (
Yes. Currently, a majority of the mortgage market operates in paper form, and possession equals perfection. So, by you controlling a piece of paper with a signature on it gives you the right to enforce and perfect your interest in the promissory note. The promissory note is the key document. It dictates how much the borrower owes you, over what terms they owe you and gives you the right to foreclose on the mortgage. And so that's the key document. It turns out that federal and state governments in the early 2000s passed legislation that created an eNote, an electronic version of this paper document. Currently 5, 6% of originations are in eNote form. But the amazing thing about the eNote, it has superpowers in that, by simply controlling this electronic document, it gives you all the rights of controlling and possessing the paper document.
Dan Wallace: (
So by originating eNotes, it enables you to have instantaneous transfer and perfection, simply by the change of control of this electronic document. What we are doing is originating eNotes, and we're managing the control of that eNote via blockchain. So now you're able to, via blockchain, you're able to have instantaneous transfer of ownership. This dramatically changes a lot of the aspects of the mortgage ecosystem, including the aggregation, sale, transfer, the velocity and the financing and warehouse of these assets. ENotes exist today. They exist in all 50 states. They don't require — like an assignment does — a recordation or a recording at a county recording office. It's simply creating the electronic version of the paper document. And like I said, it's just the transfer and control of that electronic document allows you to perfect and enforce your rights. So this, is in our opinion, at least, this is kind of the gateway to a true transformation of the first-lien mortgage to a blockchain state.
Julian Hebron: (
Thank you. And I just want that to register with everybody, because that is the critical part. So we've got about, one-and-a-half to two minutes left, so we're going to end with rapid fire around with the three of you just on this topic of — as you all begin to prove blockchain, first-lien use cases during. '22, where do you believe that the GSEs are right now on this? And these are quick answers, like onboard, not onboard, with a couple of little proof statements. And we'll start with Dan Sogorka.
Dan Sogorka: (
Yeah. They're interested. They're watching, and I think what we're doing — Figure is leading the charge — and with our partnership is proving things out, bringing them data and saying, "Hey, we did this. What do you think about that?" versus trying to pitch an idea. But everybody's interested and watching,
Julian Hebron: (
All right, thank you. Rajesh, 30 seconds.
Rajesh Bhat: (
Onboard and on track, we're working with them specifically about taking documents and making them verifiable in a way based on the data that's inside them and creating a data trail around that. And they're very supportive of that, but, we all know, this is the long form to come.
Julian Hebron: (
That's right. And Dan Wallace, last word,
Dan Wallace: (
GSEs — strong proponents of eNotes. We're going through proof of concept on the nonagency side. The GSEs are a vital part of the ecosystem, and we look forward to having discussions about the eNotes and blockchain.
Julian Hebron: (
Got it. Well, thank you, all. Thirty minutes, blockchain, pragmatism. It's so important, and three of the best on this topic, so thank you, all. And, we'll do it again very soon to keep everybody up to speed.
All: (
Thanks, everyone.