The Metaverse is defined as the simulated digital world that mimics the real world through virtual reality and augmented reality in which users can interact. As the Metaverse grows, its offerings now include “virtual” real estate. But what does virtual real estate mean for real-world mortgage professionals?
Defining virtual real estate
Real estate “as such” is defined as property consisting of land or buildings, and anything permanently attached to the land. There is a legal description. Its boundaries can be shown on a land survey and ownership is verified by physical deed in the jurisdiction where the physical property is located. Ownership gives the right to own it, sell it or rent it.
“Virtual” real estate shares many of the same general definitions of real real estate. In Decentraland or Sandbox, for example, legal descriptions are individual pixels (essentially code) that define “plots”. And, like in the physical world, there is a limit to the number of packages available. Decentraland, for example, has 90,601 individual 50′ x 50′ plots. Each package is worth real money. Ownership and rights to buy, sell, or lease are transmitted as non-fungible tokens (NFTs) on the blockchain.
Today, the law is still unclear as to whether or not virtual land in the metaverse is “real” real estate. The debate is expected to continue for years.
Is there a demand for “mortgages” to buy virtual real estate in the metaverse?
$500 million in Metaverse purchases in 2021 indicates that, yes, the demand is there. To boot, one of the first funding deals on record was made in January 2022 by tech company TerraZero. It was a $45,000 buy from Decentraland. The company did not disclose the down payment or interest rate, but noted that it was for a two-year term.
However, calling it a “mortgage” in the traditional sense may be incorrect, for now. TerraZero is not an approved mortgage lender. As of this writing, there is no public guidance from state or federal regulators as to whether mortgages for virtual real estate are governed by the traditional laws and regulations that govern traditional mortgages.
Taking out a Metaverse mortgage
To lend is to lend. Let’s take a look at some key mortgage processes and theorize how they might differ if you were taking out a Metaverse mortgage.
Application: You will need to know your consumer. A traditional Uniform Residential Loan Application (URLA) is a great place to start. Why modify a standard process that you already support? The goal is to know your borrower, and the URLA does a great job of knowing your borrower’s financial profile. Plus, the format is familiar to your creators and operations staff.
Credit: This one is a no-brainer. You will likely want to continue to assess a candidate’s historical ability to handle similar sized debts and conditions. However, you may consider a lessor credit report, which is more like a consumer credit report than a tri-merge mortgage report.
Verifications: With a lower loan amount, and no Fannie Mae or Freddie Mac representative or collateral relief, you might be tempted to skip this. However, you probably want to know the income, employment, and assets of one or more candidates with confidence. Good data is still good data, and a streamlined experience will be appreciated by your borrowers.
Note that in 2021, the biggest purchase of virtual real estate was a one-time $4.3 million transaction from Republic Realm (purchased from Atari, the video game maker). So, maybe the loan amounts are not too small after all.
Product, price and eligibility: whether you are lending for virtual real estate, an automobile or a student loan, you will probably want to clearly define your product, its price and of course the eligibility for said product/rate. Applicants are looking for different rates, terms, down payment requirements and guidelines to achieve their unique goals and objectives.
Automated Underwriting (AUS): Arguably, eligibility requirements and guidelines may suffice depending on loan amounts and lower overall origination and closing cost. As with consumer loans, you may consider a simplified AUS scorecard at the business line level to provide an instant decision to the applicant(s). Whether it’s a mortgage or a car loan, customers today expect a quick and accurate decision at the point of sale.
Fresh: This one is less obvious and more granular. Let’s break it down by loan estimation for all mortgage nerds.
Section A: Lender points and fees make a lot of sense, as they already do for non-mortgage loans.
Section B: You will have a credit report that you may want to charge. And, yes, you might want an appraisal, probably in the form of a desktop appraisal. The problem is that data and compositions are only beginning to come together. Check out MetaMetric Solutions, which provides data for the Metaverse. Meanwhile, fees in this section, such as flood certification fees, simply disappear.
Heading C: The title doesn’t make sense here since you have NFTs on the blockchain to seamlessly prove ownership. However, a settlement fee may still be required. Some entities still need to ensure that the conditions are met before the money is exchanged.
Heading E: Yay, no government fees…yet!
The IRS and government agencies have yet to provide guidance and regulation. That said, some experts believe that NFTs can be considered art, and when you buy/sell art in the real world, there is a 28% capital gains tax. Please note, this is not tax advice, just my opinion!
Heading F: Although home insurance is not required, “mortgage” insurance and prepaid interest may still make sense in this scenario.
Heading G: We have already excluded home insurance and included mortgage insurance. When it comes to property taxes, well, you can say goodbye. At least for now… there are no “property taxes” for owning virtual real estate in the metaverse.
Heading H: Similar to Section C, NFTs on the blockchain essentially render owner title insurance unnecessary.
Disclosures: The good news is that for now, many think a Metaverse “mortgage” is more like a consumer loan. Therefore, you can say that mortgage laws and regulations such as the three-day rule, TRID and others are not necessary. But we live in a world of disclosures when we lend money. It would be wise to get good advice from a lawyer here. My instinct (and opinion only) tells me to follow the consumer loan laws here!
Conditions: I don’t see this going away, especially as Metaverse mortgage amounts increase. You will still need proof of things like income, employment, assets, etc. I would say here that you can treat it more like a consumer loan and lower the requirements. At least for now, there’s no GSE involved, but you’ll still need to check your terms against the guidelines and requirements of lenders and investors.
Closing and financing: This one is also a no-brainer. You have processes in place as a mortgage lender today to close and fund properly. You’ll want to make sure your closing and financing process is as solid as your traditional mortgage process.
Secondary Markets: As mentioned above, unless you are funding from your own balance sheet, you will need to adhere to the guidelines and requirements of lenders and investors. Banks and investors are making bets in the Metaverse, and you will provide another opportunity for secondary markets to participate in this growing Metaverse market.
Finally, consider the following… In January 2022, sales exceeded $85 million, and MetaMetric Solutions projects forecast that sales could reach $1 billion in 2022.
I hope you enjoyed this journey into the metaverse. Innovate and be happy virtual dreams!