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 expands, its offerings now include “virtual” real estate. But what does virtual real estate mean for real-world mortgage professionals?
Defining virtual real estate
“Actual” real estate is defined as property consisting of land or buildings, and everything that is permanently attached to the land. There is a legal description. Its boundaries can be shown on a land survey and ownership is vetted through a physical deed in the jurisdiction, where the physical real estate is located. Ownership grants the right to possess, sell or lease it.
“Virtual” real estate shares much of the same general definitions of actual real estate. In Decentraland or Sandbox, for example, the legal descriptions are individual pixels (essentially code) that define the “parcels.” And, like in the physical world, there is a limit on how many parcels are available. Decentraland, for example, has 90,601 individual 50’ x 50’ parcels. Each parcel is worth real money. Ownership and the rights to purchase, sell or lease are conveyed as Non-Fungible Tokens (NFTs) on the blockchain.
Today, the law is not yet clear on whether or not virtual land in the Metaverse is “actual” real estate. The debate is likely to continue for years to come.
Is there demand for “mortgages” to buy virtual real estate in the Metaverse?
$500 million in Metaverse purchases in 2021 says that, yes, the demand is there. To boot, one of the first financing transactions on record was made in January 2022 by technology firm TerraZero. It was a $45,000 purchase in Decentraland. The firm didn’t disclose the down payment or interest rate, but did note that it was a two-year term.
However, to call it a “mortgage” in the traditional sense may be incorrect, for now. TerraZero is not a licensed mortgage lender. There is no public guidance from state or federal regulators at the time of this writing as to whether mortgages for virtual real estate are governed by traditional laws and regulations that govern traditional mortgages.
Underwriting a Metaverse mortgage
Lending is lending. Let’s take a look at some key mortgage processes and theorize on how they may differ if you were underwriting for a Metaverse mortgage.
Application: You’ll need to know your consumer. A traditional Uniform Residential Loan Application (URLA) is a great starting point. Why change a standard process you already support? The goal is to know your borrower and the URLA does a great job of getting to know your borrower’s financial profile. Plus, the format is familiar to your originators and operations staff.
Credit: This one is a no-brainer. You’ll likely want to continue to assess an applicant(s) historical ability to handle similarly sized debt and terms. However, you may consider a lessor credit report, one that is more akin to a consumer credit report than a mortgage tri-merge credit report.
Verifications: With a smaller loan amount, and no Fannie Mae or Freddie Mac rep and warranty relief, you may be tempted to skip on this. However, you’ll likely want to know an applicant(s) income, employment and assets with confidence. Good data is still good data, and a streamlined experience will be appreciated by your borrowers.
Note that in 2021, the largest purchase of virtual real estate was a single transaction for $4.3 million from Republic Realm (purchased from Atari, the video game maker). So, perhaps the loan amounts may not be too small after all.
Product, Pricing and Eligibility: Whether you’re lending for virtual real estate, automobiles or a student loan, you’ll probably want to clearly define your product, its pricing and of course eligibility for said product/rate. Applicant(s) are looking for different rates, terms, down payment requirements and guidelines to meet their unique goals and objectives.
Automated Underwriting (AUS): It’s arguable that eligibility requirements and guidelines may suffice based on loan amounts and an overall lower cost of origination and closing. Similar to consumer lending, you may consider a simplified tradeline-level AUS scorecard to deliver an instant decision to applicant(s). Whether for a mortgage or a car loan, customers today expect speedy and accurate decisioning in the point-of-sale.
Fees: This one is less obvious and more granular. Let’s break it down by the loan estimate for all you mortgage nerds.
Section A: Points and lender fees make a lot of sense, as they already do for non-mortgages.
Section B: You’ll have a credit report you may want to charge for. And, yes, you may want an appraisal, probably in the form similar to a desktop appraisal. The problem is, data and comps are only starting to come together. Check out MetaMetric Solutions, who is providing data for the Metaverse. Meanwhile, fees in this section, such as flood certification fees, simply go away entirely.
Section C: Title doesn’t make sense here since you have NFTs on the blockchain to prove ownership with full transparency. However, settlement fees may still be necessary. Some entity still needs to make sure conditions are satisfied before money exchanges hands.
Section E: Yay, no government fees… for now!
The IRS and government agencies haven’t provided guidance and regulation yet. That said, some experts believe that NFTs can be thought of like art, and when you buy/sell art in the real world there is a collectibles Capital Gains Tax of 28%. Note, this is not tax advice, just my opinion!
Section F: While there is no need for homeowners insurance, “mortgage” insurance and prepaid interest may still make sense in this scenario.
Section G: We already ruled out homeowners insurance and included mortgage insurance. As for property taxes, well, you can kiss that goodbye. At least for now… there are no “property taxes” for owning virtual real estate in the Metaverse.
Section H: Similar to Section C, NFTs on the blockchain essentially make owner’s title insurance unnecessary.
Disclosures: The good news is that for now, many believe a Metaverse “mortgage” is more like a consumer loan. Therefore, you can argue that mortgage laws and regulations such as the three-day rule, TRID and the like are not necessary. But we do live in a world of disclosures when lending money. It would be prudent to get some good advice here from an attorney. My gut (and opinion only) says to follow consumer lending laws here!
Conditions: I don’t see this going away, especially as Metaverse mortgage loan amounts increase. You’ll still want evidence of items such as income, employment, assets and the like. I would argue here that you can treat this more like a consumer loan and lessen the requirements. At least for now, there is no GSE involved, but you’ll still need to bump your conditions against lender and investor guidelines and requirements.
Closing and Funding: This one is a no-brainer as well. You have processes in place as a mortgage lender today to properly close and fund. You’ll want to make sure your closing and funding process is as strong as your traditional mortgage process.
Secondary Markets: As alluded to above, unless you are funding from your own balance sheet, you’ll have lender and investor guidelines and requirements to adhere to. Banks and investors are making bets in the Metaverse, and you’ll offer another opportunity for the secondary markets to participate in this growing Metaverse marketplace.
Lastly, consider the following… In January 2022, sales topped $85 million and MetaMetric Solutions projects that sales could reach $1 billion in 2022.
Hope you enjoyed this journey into the Metaverse. Innovate and happy virtual dreams!