The decision to allow the ICE – Black Knight merger to proceed announces the digital integration of the real estate value chain anticipated for over 25 years. Digitization redraws industry boundaries and changes how the value of information is expressed, enriched and exchanged. The capital, capability and content are present to make all real estate markets smarter, faster, safer and connected. Consumers, communities and taxpayers are major beneficiaries.
Residential property transactions are manufactured with data components assembled from disconnected and diverse sources. Many industries began to deploy electronic supply chains in the 1980’s. Real estate still relies on a “system” unable to integrate production across the silos of media, brokerage, lending, insurance and trading. The result is higher costs, lower productivity, unmeasured quality, and systemic exposure as government monopolies take most of the risk and make most of the money. The GSE’s $8B profit in 2Q could buy most of the brokerage industry.
Technology and the trust model
Real estate is too vital to our economy to be so financially concentrated and functionally outdated. Technology hasn’t been the barrier since 1998 when Equifax, and later other firms, developed systems to secure complex, multi-party transactions over the Internet. Lenders began to define the “trust model” of standards, contracts and shared services necessary to achieve cross industry interoperability.
Conflicts among special interests and then the GFC prevented full adoption. Low interest rates and purchases of Agency securities helped to foster a – don’t fix what’s not broken mindset. The reckoning has brought staff reductions, loan repurchases, higher reserves and mass consolidation.
Behind the headlines of locked-in supply and tighter credit is the start of a new real estate cycle driven by the urbanization of the suburbs. Information deficits are a feature of secular shifts until new insights fill the knowledge gaps. Geographically aware marketplaces that link listings, lending and liquidity will unlock actionable information.
ICE is best known as the owner of global marketplaces including the New York Stock Exchange. It entered real estate in 2012 after buying DebtMarket, an exchange for distressed home debt. A sequence of acquisitions followed that targeted the control points of a next generation operating system.
MERS provided a trusted “golden record” of the owner of the mortgage loan asset, Simplifile reaches the county recording end-points, IDC integrated $5.2B of data services, Ellie Mae added $11B of origination processing, risQ made location risk visible and now Black Knight delivers another $11B of MLS capability, public data and consumer payments. This massive bet on a digital future delivers trusted connections to verify parts (data), eliminates rework, assures quality and collapses the cycle time of a loan.
The power of innovation
ICE’s network, data and trading system architecture can power innovation to transform fixed income capital markets. A “Housing Capital Cloud” would unify the fragmented ecosystem to package, evaluate and distribute information based “durable goods.” Lenders should expect to redesign workflows and business rules to determine if a loan is “Fit 4 Sale.”
Homebuyers and other investors will gain better views of risk and return as hyper local “Forward” projections inform valuations and pricing for a range of assets. A “Lens” that creates a shared understanding of all property sub-markets may enable the private and public sectors to effectively target capital that meets the challenges of housing affordability, struggling downtowns, fiscal imbalances and social inequities that unevenly affect every community.
The basis of competition is shifting as ICE, CoStar, Zillow, and the GSEs after release, contend for consumer attention, top producer loyalty and data supremacy. ICE has previewed a Consumer Engagement Suite which could deliver a list-to-loan-to-servicing experience. Realtors have a structural advantage as the listing event is the signal to downstream transactions. Will they ever share in the value of their data to profit beyond the first point of sale?
ICE promises a systemwide upgrade where everyone wins except the unstable status quo. Digitization will enable industry efficiency, new choices for consumers and communities, reliable liquidity for capital markets and risk aware pricing of guarantees. The “on platform” first movers will grow profit margins, gain market share and build brand equity by controlling their digital rights, adopting interoperability standards and creating greater value from local networks. Success means zero defect loans, costing $2K to manufacture, for 5M new homes, built in the right places.
This merger means modernization that advances real estate toward an adaptive, sustainable and connected future.
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. He is a current public companies board member and cofounder of Places Platform LLC.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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