Fractionalizing Real Estate Debt vs Equity

I often get the question whether introduction of further securitization, fractionalization in Property is even a good idea. Detractors point to the fact that Mortgage backed securities (MBS) were the big reason why the 2008 crisis. Surely adding more fractional property to the mix would only bring back the same problems that manifested itself before.

That is however a simplistic approach and is akin to throwing the baby with the bath water.

MBS were not backed directly by real estate, but by mortgages on real estate. Mortgages are a funny thing, they give a false impression of security and stability when in reality they crack under pressure rather than bend and bow.

Suppose you buy a property for a million and have a mortgage of $900K. In a good year your property rises to $1.1M, great upside for you. And the mortgagee is happy as long as you keep servicing the monthly payments.

But suppose the economy slows down and there is now a lesser demand for housing in your area. The house value goes below $900K. Suddenly you have a mortgage that is worth more than the house. Even if you wanted to sell it you would make a loss. And you still have to continue paying the installments.

You cant find a job in a new location as you cant afford to pay the rent as well as have this house sit empty (no demand in your area). You are stuck between the devil and the deep sea.

This is exactly what happened in the US in 08 and the result was a number of people just handed in the keys and walked. That cratered housing prices even more and things went in a free fall.

The problem was exacerbated by MBS's which were sliced and diced mortgages, sold and onsold and insured and counter insured in all sorts of manners till no one was completely certain how things would unfold. The system went into a meltdown and the world economy is still reeling in the wake of the biggest shock since the great depression.

The issue with mortgages is its fixed nature. Had it been a co-ownership model where the price of the security was directly linked to the price of the house, then it would have fallen in price as the market dropped but without causing a systemic breakdown.

An equity based fractionalization would adjust to the market prices, flex, bend and bow rather than crack when the market moves against you. This would mean in good times the people giving the money to the home owner would also see an upside, but in bad times the owner would not have his neck on the line.

A mortgage often destroys the ability to take risk. Many an aspiring entrepreneurs have deferred their ventures as they had a mortgage to consider. Not having the liability of a 30 year mortgage can unlock the potential of millions and bring a new fillip in the economy.

Debt fuelled asset prices often lose their link to the true value.

An equity based fractionalization could be more realistic and keep prices under control.

Fractional property done correctly can make real estate more liquid and also remove some of the big distorting effects of real estate on the economy.

Craig P.

Head of Technology at The Myubi Foundation

6 年

Tokenization of asset-backed securities, such as fractional ownership of real estate on the blockchain, seeks to correct the previous mistakes of Government deregulation and subsequent creation of complicated financial corporate debt instruments, such as CDO's, backed by corrupted centralized rating agencies.

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Symon Peters

Founder - 360Collective | Affordable Housing Development | Investing | Property Development | Futurist

6 年

I would add that the if the value of an asset goes down then of course the fractional investors interest decreases but that is not necessarily a deal breaker as it was in the GFC where the banks had to repossess the assets and foreclose etc.? In the fractional situation, securities can still be traded in fractions at lower prices that may not be as disastrous in value decimation, as opposed to one large asset sale which often is a disaster for both the banks and the asset owner.?? My view is that fractions would not break an individual security owner and therefore in many cases they would chose to ride it out and not force a sale in a poor climate.??Assets are well known to rise and fall but its the pressure of large institutions having to keep to their stated policy and legal frameworks that is inflexible.

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