You have probably heard of Figure, Mike Cagney’s second act in fintech. But you might not have heard of Provenance, the new blockchain protocol that Mike and his team have created. In this article I will share why I think both initiatives are important to the future of fintech.
I caught up with Mike last week to discuss the progress he is making with Figure and Provenance, and the opportunity he sees in front of them.
The Figure Home Equity Loan Plus
Figure launched their first product over the summer called Home Equity Loan Plus. They claim it is the fastest home equity loan on the planet with approvals in five minutes and funding in just five days. Customers can borrow up to $100,000 with APRs starting at 5.49% and loan terms of five, seven, 10 or 15 years. This is an entirely digital origination process, more on that shortly, and no physical appraisal of the property is required which is one way they can make the process so fast.
Customers verify their identity by uploading a photo and an approved ID such as a driver’s license or passport. There is an electronic signature process that involves communicating with notaries in Texas or Nevada via webcam. So far, Mike said, customers have been very happy with the process although it Is obviously early days. He says they are on track to do $15-$20 million of home equity loans in November.
Provenance Destined to be a Real Game Changer?
1What is most interesting about their home equity product is what happens on the back end. This is where their blockchain protocol, Provenance, comes in. The loans are originated on the Provenance blockchain and then all activity with each loan happens on the blockchain. A package is created with title, automated valuation model, a promissory note and demonstration of funding. The signature of the promissory note happens on blockchain as well and everything is captured in a way that is irrefutable. All payments are also processed on the blockchain.
This starts to get really interesting when you think about the trading of these loans. The securitization process can be turned on its head. You can eliminate or reduce the role of many intermediaries in this process: administrators, trustees, custodians and auditors who contribute around 65 bps in cost to each deal.
Because everything happens on the blockchain in real time there is always complete visibility into the underlying collateral. The bonds that are created in these deals can trade in real time as well. Mike estimates this provides another 21 bps of value, which means 86 bps total in savings for each deal. The Provenance ecosystem will take one-third of these savings for the stakeholders.
Figure is intended to be the first proof of concept for Provenance and the intention is to do an initial $150 to $200 million securitization of the home equity loans in Q2 next year. But Mike is already talking with some other lenders who are interested in moving their loan portfolios to Provenance. He said the idea is getting traction quicker than he expected. They already have two investment banks as strategic partners here: Credit Suisse and Jefferies.
I should point out that while Provenance is part of Figure today that will not be the case much longer. Provenance is being spun out and will have an office in Reno, Nevada while Figure will be headquartered in San Francisco.
Figure’s Sell-Lease Back Product
Now, back to Figure’s second product that launched just last week. It is an alternative to reverse mortgages they call Figure Home Advantage. This a sell-lease back product where the home owner sells their home to Figure who then immediately rents it back to the (former) home owner.
Many people, particularly those who are retired, have built up significant equity in their home. Often the vast majority of their net worth is in their home but they don’t want to move so they can’t access this equity easily. Reverse mortgage are expensive and a bad fit for many people. What Figure is doing is buying the house outright, thereby releasing all the equity to the home owner, but then renting the home back so they can stay in their home.
They expect the average selling price for homes will be in the $250,000 to $500,000 range. They have lined up a big investor in the space who will provide the financing for these deals. They will warehouse the properties and the plan is then to aggregate them into a REIT, then issue this REIT on the Provenance blockchain.
When I asked Mike where he was spending his time these days he said that the most exciting opportunity is the blockchain business. This has the chance to create a new paradigm in finance. There are many other use cases beyond what has been discussed here. Fund managers can move their funds onto the blockchain and cut the administrator costs pretty significantly. Title insurance is another area and Mike mentioned that they are planning to do a digital title project in a couple of counties next year.
My Take
After my discussion with Mike it struck me that while there has been considerable innovation in finance in recent years there are still many areas where decades old processes remain. Take securitization for example. While technology has helped make this process incrementally more efficient the way deals are done today is pretty much the same way they were done 20 or 30 years ago. With Provenance you are talking about a completely new paradigm in the way assets are traded.
Figure is off to a great start and I have no doubt that Mike and his team will create a successful company there. As for Provenance I have no idea how that is going to go. It seems to be off to a good start but it really needs the buy in from some of the largest asset managers such as Blackrock and Fidelity if it is to become mainstream. That is not going to happen overnight. But there is clearly some early traction happening.
When Mike started SoFi many years ago he created an entirely new asset class: refinancing student loans. With Figure he is challenging the status quo on home equity loans and introducing a new sell-lease back product. But with Provenance he has created something that could be a game changer in the way assets are administered and traded.
Regardless of the outcomes here, what I appreciate about Mike is that he is always pushing us forward as an industry. He has a unique ability to think outside the box and then execute on a vision that no one else has seen. His ideas may or may not change the world but he is certainly making a dent in the fintech universe.
