Blockchain Marketplace Opens Up Home Equity Asset Class08.12.2022
A blockchain-based real estate marketplace has been launched by QuantmRE and Texture Capital which shows the benefit of distributed ledger technology in unlocking previously illiquid asset classes.
Richard Johnson, chief executive of Texture Capital, told Markets Media there is tremendous potential in putting alternative assets on a blockchain, so they can be traded. Texture Capital is one of the few digital asset securities broker-dealers that operates an alternative trading system that has been registered with the US Securities and Exchange Commission, and provides tools for issuance, tokenization and secondary market trading.
Johnson said: “We have been looking at real estate for a while but other marketplaces that we are discussing span from music royalties and film financing to Web3 strategies.”
QuantmRE provides home equity agreements, which give homeowners a lump sum in return for a share of the current value of their property and a share of any potential price increase. A real estate asset is created and secured by a lien on the homeowners house. Homeowners do not have to take on additional debt or make monthly payments as QuantmRE becomes an investor in the property.
The firm’s partnership with Texture Capital and the launch of its blockchain-based Home Equity Marketplace allows investors, ranging from individuals to institutions, to trade tokenized fractions of the home equity agreements.
Matthew Sullivan, founder and chief executive of QuantmRE, told Markets Media that the real estate assets are an equity-based investment but do provide investors with any cash flow. In addition, investors may have to wait a long time to obtain a return if the homeowner waits 10 or 20 years to sell or refinance their house.
We are excited to partner with @quantmre to power their new blockchain based marketplace for tokenized Home Equity Agreements. This partnership will enable investors to gain exposure to residential home equity through fractionalized investment contracts.https://t.co/h1hE17LcEh
— TextureCapital (@texture_capital) August 9, 2022
Sullivan said: “QuantmRE’s marketplace chops that investment into lots of little pieces and then offers them so smaller investors can buy into this interesting asset class of equity in owner-occupied homes, an untapped multi-trillion dollar asset class.”
Freddie Mac has estimated that the home equity agreement market is more than $25 trillion according to QuantmRE. Sullivan continued that QuantmRE realized that blockchain was the ideal technology to keep track of fractionalised home equity agreements.
“We have created a platform that enables us to originate home equity agreements with homeowners, create the assets and put them on a marketplace,” added Sullivan. “We were missing the vital ingredient of compliance with regulatory requirements to be able to grow and scale this business throughout the United States and beyond.”
As a result QuantmRE has partnered with Texture Capital which Sullivan said brings expertise in working with digital securities in a regulated environment and can support trading of the real estate tokens.
Sullivan said: “It solves the problem of investors potentially owning a long-dated investment with no cash flow as they can trade in and out of a digital security.”
There is a debate over regulating digital assets in the US and whether they should be treated as securities and regulated by the Securities and Exchange Commission, or as commodities overseen by the Commodity Futures Trading Commission. Sullivan said the real estate tokens are securities and the marketplace will operate under securities regulations.
Johnson continued that he launched Texture Capital in 2020 because he believed that digital asset tokens are securities, which is why its proprietary ATS is registered with the SEC to comply with all the relevant regulations including know your customer and anti-money laundering requirements.
“We are excited about leveraging the platform that we have built and apply it to this previously inaccessible marketplace,” Johnson added. “It is very much a perfect fit, like peanut butter and jelly.”
Excited to announce our partnership with @texture_capital! Together with @Algorand we're making home equity accessible, investible and tradable on the Blockchain. #Algorand #realestateinvesting #blockchain l
— QuantmRE (@quantmre) August 9, 2022
The Home Equity Marketplace currently operates under a Regulation D exemption from the SEC which allows tokens to be sold to accredited investors. The roadmap is to receive a Regulation A exemption from the SEC to offer tokens to non-accredited investors and broaden the investor base.
The two firms will be collaborating immediately on new issuances and tokenization according to Johnson. There is a one-year holding period for a Reg D issuance so secondary trading is unlikely to start before 2023.
Sullivan highlighted that there will be activity on the platform before secondary trading begins as QuantmRE has a pipeline of home equity agreements to be tokenized and issued and that will be acquired by investors in the primary market. Texture Capital is building API integration to provide QuantmRE clients with a seamless connection to the ATS.
“The most important thing for investors is that pathway to liquidity,” said Sullivan.
He continued there have been two securitizations of home equity agreements, which will also boost secondary market activity.
In February this year Unison, a San Francisco-based company that sells residential equity agreements, announced a $443m securitization which it said gives more access to institutional investors who want to participate in the sector.
Unison said in a statement: “This milestone transaction is the largest securitization of REAs to date, rounding out a historical year of growth for the fintech company.”
Sullivan believes that the home equity agreement sector could follow the trajectory of the mortgage-backed securities market, but while not increasing leverage to homeowners.
“Our platform provides wider access to investors and that is the holy grail,” he said. “We can become a wholesale marketplace for all home equity agreement providers.”
Johnson also believes the asset class is going to become mainstream.
“The new marketplace is a great example of the benefits of blockchain and using this technology to unlock an esoteric asset class,” Johnson added.
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