Tag Archives: investor protection

Tokenized Residential Real Estate

Posted on by
Reply

I am excited that Who Controls the Block? How States Can Regulate Tokenized Residential Real Estate (co-authored with Bizub & Peralta) is forthcoming in the Texas A&M Law Review. The abstract reads,

In July 2025, the City of Detroit filed a major nuisance abatement action against RealT, a fintech that had sold blockchain-based fractional interests in more than four hundred Detroit rental properties to some 22,000 investors around the world. Within a year, a court had ordered the company’s rents into escrow, the company had conceded to its investors that its “model no longer works,” and it had announced the liquidation of its portfolio  —  leaving tenants without basic services and token holders facing steep losses.

This article uses the rise and collapse of RealT, together with case studies of the other leading real estate tokenization business models, to evaluate the claims made for tokenized real estate as a new asset class for individual investors. Measured against the publicly-traded REIT, tokenization offers only one advantage to investors —  a bespoke level of diversification  —  and it does so while shedding the investor protections that registration and exchange listing provide. More fundamentally, the leading business models rest on skirting the state and local legal infrastructure of real property: recording regimes, transfer and property taxation, and homeowner and tenant protections. Like the mortgage industry’s Mortgage Electronic Registration Systems, Inc. (“MERS”) a generation ago, tokenization externalizes the costs of that end-run onto the parties least able to bear them.

Real estate tokenization is still in its infancy, and state and local governments have a window of opportunity to shape how these fintechs operate within their borders. Some have begun to use it: Maine’s first-in-the-nation statute regulating shared appreciation agreements supplies one template, and Detroit’s enforcement campaign another. This article maps the gaps that remain  —  most notably in transfer taxation and tenant protection  —  and offers an agenda for closing them before tokenization scales.

Who Controls the Block? How States Can Regulate Tokenized Residential Real Estate

Posted on by
Reply

AI Image created with ChatGPT

I have posted Who Controls the Block? How States Can Regulate Tokenized Residential Real Estate to SSRN (with Bizub & Peralta). The abstract reads,

In July 2025, the City of Detroit filed a major nuisance abatement action against RealT, a fintech that had sold blockchain-based fractional interests in more than four hundred Detroit rental properties to some 22,000 investors around the world. Within a year, a court had ordered the company’s rents into escrow, the company had conceded to its investors that its “model no longer works,” and it had announced the liquidation of its portfolio  —  leaving tenants without basic services and token holders facing steep losses.

This article uses the rise and collapse of RealT, together with case studies of the other leading real estate tokenization business models, to evaluate the claims made for tokenized real estate as a new asset class for individual investors. Measured against the publicly-traded REIT, tokenization offers only one advantage to investors —  a bespoke level of diversification  —  and it does so while shedding the investor protections that registration and exchange listing provide. More fundamentally, the leading business models rest on skirting the state and local legal infrastructure of real property: recording regimes, transfer and property taxation, and homeowner and tenant protections. Like the mortgage industry’s Mortgage Electronic Registration Systems, Inc. (“MERS”) a generation ago, tokenization externalizes the costs of that end-run onto the parties least able to bear them.

Real estate tokenization is still in its infancy, and state and local governments have a window of opportunity to shape how these fintechs operate within their borders. Some have begun to use it: Maine’s first-in-the-nation statute regulating shared appreciation agreements supplies one template, and Detroit’s enforcement campaign another. This article maps the gaps that remain  —  most notably in transfer taxation and tenant protection  —  and offers an agenda for closing them before tokenization scales.

 

The Future of Securitization

Posted on by
SEC Commissioner Piwowar

SEC Commissioner Piwowar

SEC Commissioner Michael Piwowar’s Remarks at ABS Vegas 2016 are worth a look for all of those interested in the future of the mortgage-backed securities market. I have interspersed selections of his remarks with my comments:

As our country’s capital markets regulator, the SEC’s tripartite mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.  Securitization can transform illiquid assets like mortgages, auto loans, credit card receivables, and future sales of David Bowie albums into marketable securities.  By serving as an efficient means of allocating scarce capital, securitization supports economic growth, business development, and job creation.  Securitization further fosters resiliency by diversifying the funding base of our economy.

There are many other benefits associated with securitization, including the potential for reduced costs of, and expanded access to, credit for borrowers, the ability to match risk profiles for specific investor demands, and increased secondary market liquidity.  Because banks and other originators can move loans off of their balance sheets into asset-backed securities (ABS), securitization can increase the availability of credit for both businesses and individuals.  In many instances, securitization can allow a person to obtain more favorable terms than can be obtained from a bank or other financial institution.

Thus, the ABS market serves as a critical source of capital, providing funding for home and automobile loans, credit cards, and many other purposes.  Yet, as shown during the recent financial crisis, investors may abandon the ABS market if they do not believe they possess sufficient information to evaluate the risks associated with a particular asset-backed security and to price it accordingly.

While I generally agree with Piwowar’s assessment of securitization’s value, it is worth noting that he does not acknowledge how important robust consumer protection is to maintaining a healthy securitization market over the long run.

I found his discussion of the Dodd-Frank credit risk retention rules particularly interesting:

For the record, I voted against the credit risk retention rules.  These rules require a securitizer to retain a minimum 5% credit risk of any securitization transaction and generally prohibit the sponsor from hedging its retained interest.  I was particularly dismayed by the “one-size-fits-all” approach taken by the regulators to create a flat 5% risk retention requirement for all asset classes, except for securitizations involving so-called “qualified residential mortgages” (QRMs) for which the risk retention level is zero.  These were arbitrary choices.

Residential mortgages, commercial mortgages, credit card receivables, and automobile loans each have distinct and different attributes associated with their underlying borrowers.  Rather than carefully examining these attributes to determine an optimal credit risk retention rate for each asset class, prudential regulators in Washington, D.C., took the easy way out – they simply set it at the maximum statutory rate and ignored the authorization from Congress to create lower risk retention requirements or use alternative methods to align interests.

Perhaps the prudential bureaucrats had their own conflict of interests in setting these requirements.  After all, a prudential bureaucrat has a strong interest in self-preservation.  Will a prudential bureaucrat get credit if optimally tailored risk retention rates increase economic growth and provide additional opportunities to families and businesses across America?  No.  Will a prudential bureaucrat take the blame if the next financial crisis – and there will be one eventually – relates at all to securitizations?  Probably.  Hence, what better way to side step responsibility than to refrain from using reasoned judgment and rely solely on the most risk-averse interpretation of statute instead?

Bureaucratic self-preservation might also explain the decision to adopt as broad of an exemption for QRMs as possible, so as to minimize any political fallout from the real estate and housing industries.  Few will disagree that residential mortgage-backed securities played an important role in the 2008 financial crisis.  For those in the audience involved in RMBS offerings, you must be quite happy with the broad exemption from the risk retention rules.  For those of you in the audience who are involved in other types of securitizations that had little, if any, part in causing the financial crisis, you are probably wondering why you were unfairly targeted.  Unfortunately, unlike Las Vegas, what happens in Washington does not stay in Washington. (footnotes omitted)

Piwowar gives short shrift to the benefits of clear and simple rules, but it is still worth paying attention to his critique of the “one size fits all” risk retention rules. If researchers can demonstrate that these rules are not optimally tailored, perhaps that would provide a reason to reconsider them. This is, of course, a long shot, given that the rules have been finalized, but Piwowar is right to shine light on the issue nonetheless.

Candid and thoughtful remarks from regulators are always refreshing. These make the grade.