[NS-DROP] MIP6 Application: New Silver DROP: Real Estate-Backed Loans

I like the idea of “bring your own keeper” for these companies bringing real world assets on Maker. I don’t think the DeFi community is set up to handle these, plus with the tranches, liquidations should be rare

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@Jtathmann,

“the bring your own keeper” is for some cases essential, as some assets are considered debt instruments and so (in the US) are covered by US laws on securites which limits buyers to being accredited investors or licensed financial companies.

Yes @monteluna , I also see the liquidation issue as the largest remaining issue for the various DROP tokens.

@spin - maybe you can answer this:
How does Maker ensure that Vaults opened with NS-DROP is actually being spent on refurbishing real estate? Is there some way to double check this through Centrifuge?

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Apologies for the small tangent…

@LongForWisdom @charlesstlouis Updating the MIP6 application template to include a keeper infrastructure question would require an amendment, yes?

Might be easier to just ask a follow up question after they submit…

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@Jtathmann, yes it would. But the greater issue is that MIP6 will need a whole new chapter for real world assets.

@Jtathmann In order to add or remove a question from the current MIP6 application template, one would use the MIP6c3: Application Template Amendment Process to create and propose a MIP6c3-SP subproposal with this template. Note that the RFC stage for this change is at least one month (feedback period / frozen period). In general, asking additional questions to the MIP6 proposer is encouraged, so you can always do that but if you want all future MIP6 applications to answer it, proposing it to be formally added to the MIP6 Application list is the best way to go about it.

@Planet_X In my personal opinion, I believe that real-world assets (RWAs) fall under the Collateral Onboarding problem space. Thus, any proposal related to RWA Collateral Onboarding would be added to the current Collateral Onboarding MIPs Set going forward and follow the same onboarding framework.

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Hi All,

Thanks for submitting this collateral onboarding application. Before I get into my questions, I’ll take the time to point others to my prior write-ups on questions about Centrifuge and their Tinlake model. You can read those chains regarding Consulfreight and Paperchain. @Planet_X also touched on a core issue for Centrifuge above, namely liquidations (I would add Emergency Shutdown, too, as an open question because it seems that it was never experimented with during the Pilots that Centrifuge writes about frequently).

Regardless, I want to focus on New Silver and including these real estate-linked assets in the Maker Protocol. It’s an exciting opportunity, for sure, if done correctly and in compliance with the applicable regulations.

FWIW, I am not a real estate investment expert, so please excuse my ignorance if I am asking a “stupid” question or two. That said, could the New Silver team respond to a few items that popped up while I did due diligence on this application and its backers:

  • As stated on its website, New Silver is a “hard money” direct lender. My assumption was that most hard money lenders operating in the US were required to hold state lending licenses. (Here’s this article for high-level background).

  • I went through the applicable real estate licensing websites for some of the states mentioned on NS’s home page (Montana, Iowa and Florida), and I couldn’t find information for “New Silver.” Can you please let us know if New Silver carries any licenses in the thirty-nine (39) states where it operates? Admittedly, I probably don’t know the name of the correct entity, but if you can give some color to clear this up that would be great.

  • If New Silver doesn’t carry licensure in any of those states, can you please explain why? I understand that there might be a reason why the lending you do does not require a license. Still, in my opinion, the DAO should be aware of that while it reviews the collateral.

  • Also, if New Silver or an affiliated entity has lending licenses, can you please provide the license and registration numbers state-by-state? I’m sure some DAO members and MKR holders, aside from me, would also like to verify.

  • Lastly, I did some searching on Google and came across information on a recent venture by New Silver’s founders (led by Kirill Bensonoff), Caviar. It appears that the Massachusetts Securities Division brought an enforcement action against Caviar (here’s the administrative complaint) and its founders in January 2018 for an ICO/unregistered securities offering. Here’s another story and another I found regarding the matter for any DAO members who are interested.

  • Can New Silver (or Mr. Bensonoff) provide some insights on what came of the Massachusetts Securities Division lawsuit and whether (and how) it was resolved? Also, can you please confirm if the lawsuit is still ongoing?

  • I believe it’s important to look into Caviar for several reasons. First, the Caviar enforcement action runs quite close to the founding of New Silver (the state filed its complaint in January 2018, and New Silver was founded “in 2018”). Second, it seems that there is overlap in the corporate ownership of both Caviar and New Silver (Mr. Bensonoff was the CEO of Caviar and is the managing partner of New Silver).

  • What’s more, I am worried that negative consequences from the litigation for Caviar may color the operations of New Silver. And an enforcement against Caviar could complicate the ability of New Silver’s leadership team to provide collateral for the Maker Protocol.

Evaluating projects and their prospective collateral requires us to look at tokens, their development and economic modeling and the backgrounds of the project teams. On that note, though I think New Silver’s application is interesting, the DAO should address these questions as part of the green lighting process.

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Thank you everyone for your questions, this is Kirill, the Managing Partner of New Silver. I will try to answer your questions here.

In terms of licensing, the resource you pointed to is not correct (it also appears they are in the business of helping companies secure licensing). We provide business purpose (non-consumer) loans secured by real estate, and licensing is not required in 40 of the 50 states. We do not operate in states where licensing is required, and the states listed on the Locations page are states where we operate. This information was confirmed to us by our law firm Geraci, which focuses on law for our industry. Happy to expand with more specifics on this if necessary.

On your questions around Caviar, this was a company I was involved in in 2017-18. Caviar and New Silver are totally different entities and have no business overlap. Caviar performed a compliant fund-raise outside of the United States, reliant upon Reg S exemption from registration. However, the Massachusetts Securities Division, headed by Secretary of State Bill Galvin (who was up for re-election in 2018 and facing a tough opponent), used the ongoing hype around cryptocurrencies as a PR platform to get media exposure to help his campaign. He announced that he did not like Bitcoin because it “did not pass his smell test” and waged an aggressive campaign against blockchain startups. Unfortunately, we were one of those startups and were caught in the cross-hairs. The only allegation the state made was that we had conducted our “offering” improperly and targeted MA residents by advertising to them on social media. Their only evidence to this was that their investigator saw one of our ads, and this happened because they were “re-targeted” by Google (the investigator first went to our website and then saw our ad by being re-targeted). Our marketing company, while excluding US and some other countries from our ads, did not turn off re-targeting US users. After the re-election of Galvin and the Bitcoin crash of 2018, the state lost interest and went dark on us. We did no want to litigate and waste time and money, and decided to settle in February of 2019, paid a fine and agreed to refund any investor from the state of MA (of which there were not any). As a result, we also decided to close Caviar and provided refunds to all investors. This was from a time long ago and has no bearing on our activities today and in the future.

I hope I have provided some color on this and happy to answer questions as they come up.

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Thanks for your question, I put together a reply to each of the parts below.

  1. This is a very good question and is certainly at the forefront of our thinking, which I can share here. We believe that in the medium to long term, the fundamentals of the SFR asset class are strong – US is still a top economy, creating innovation and attracting skilled workers, who at some point start a family and want the American dream of homeownership (or an SFR rental in the suburbs). In the shorter term, things are a bit more uncertain. We have not seen any pressure to the downside yet, actually, we have seen price appreciation due to low inventory. We are guided by data, and one of the better recent data analysis was done by Zillow in this publication. Zillow economists predict a 2-3% price decline. We have analyzed other data and we are guided by a potential price decline of 0-5%. Most of our loans are 12 months, and the exit strategy for borrowers is a consumer sale, and this should be robust while mortgage rates are so low (we put our long term product Rent on hold for now). So given the short term loan duration, when we are underwriting loans, we look at areas where the highest price drops occurred in the last recession, and often times will reduce the loan leverage or the collateral value by up to 5% to compensate for the potential price decrease.

  2. If I understand your question correctly, you are asking about loan to value? We go up to 85% Loan To Value, and we only advance the money for purchase upfront. The borrower then needs to begin construction using their own funds, and after construction is partially complete, we send an inspector who reviews and puts a value on the amount of work completed, and we reimburse the owner for that partial work according to the terms of their loan.

  3. It will be a pool of loans from different geographies

  4. There will be 2 tranches, senior (represented by the DROP token) and junior (represented by the TIN token). We propose MakerDAO to participate in the senior tranche (NS-DROP), and New Silver and other investors will have direct stake in the pool by participating in the junior tranche, which takes first loss.

  5. No, though we may use a bank credit facility in conjunction with other credit. Bank facility costs are very low right now, and we don’t anticipate them increasing by much any time soon.

  6. We originated 123 loans

  7. 39 have been paid off

  8. 84 are still outstanding

  9. I would like to provide clarity on this but don’t understand what you are asking. Can you give more context?

  10. Our system tracks all applications, if a person applies again, we will know they were denied previously and review why. There might be times when they were denied because of poor credit, and it has improved, so we may consider them again.

  11. The collateral is valued with at least 2 independent data points – the first being an AVM (Automated Valuation Model) which we source from a partner (Clear Capital), the second being an on-site appraisal performed by an independent appraiser. If there is a large price discrepancy, we use other sources to either review the appraisal (desktop review) or use a third valuation source to confirm value.

  12. We are open to discussing a “bring your own keeper” scenario, but we are also connected with multiple third parties who buy distressed loans, so we can facilitate a process with them.

  13. The average loan amount has been $177,000

  14. We anticipate that the liquidation fee can be lower than 13% as the assets are much more stable compared to current crypt-collateral - but of course the risk team and the MakerDAO governance should be involved in this process to determine the precise parameters.

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I was the former head of residential loan pricing at HSBC, and home equity loan pricing at Wells Fargo. As a consultant with a Big 4 accounting firm, I assisted top 10 banks in the late 00s value/bid on major, headline worthy acquisitions. Besides pricing individual resi loans, I structured and traded whole loan pools, and structured and traded MBS. Some of the remarks about the motivations of the rating agencies and rationale for the 2008 collapse belie the fact that risk was mis-priced. Whose fault that was is for history to decide. Full disclosure, I love what the Centrifuge team is putting together and kudos to Maker Foundation for encouraging this great fintech laboratory.

In theory, there’s no reason why the proposed structure cannot work. On the pricing side, the unsophisticated DeFI community would likely mis-price risk, unless they treated all of these as unsecured investments. At that point, New Silver should always get better priced financing from a traditional lender who understands the nuances of real estate loans. Alternatively, if the DeFI community under-priced the risk to see some action, then there is reputation risk when all the losses get driven right to their wallets.

Perhaps allowing only qualified lenders to trade these tokens or ask Centrifuge to setup an unsecured tranche for folks to fund would be a good start. On the recourse side, it would be nice to see an example where a court, anywhere, enforced recourse based on token ownership. I imagine the first time will be drawn out and expensive, but someone will have to pick that fight eventually so that precedent can be established. All in all, a great idea and something that I think is a forgone conclusion in the space.

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Thank you for your feedback. On the pricing side, I believe the DeFi community has become fairly sophisticated, and in addition, the risk team would be heavily involved. Also, the plan is to have a junior tranche in a first loss position. The loan leverage is consistent with market conditions and takes into account various factors on the borrower and the collateral with the effort to reduce risk. We believe the risk to the network should be very small.

On the recourse, just to be clear, in addition to tokens, there is a legal agreement that gets signed, so any court enforcement should be fairly standard.

It would be neat to see how the community figures out how to handle recourse. For instance, would there be votes to appoint an attorney? Super interesting!

Pricing wise, with any mature asset class you have scores of folks that work at institutions whose job it is to optimize returns. That means understanding not only the collateral, the borrower, and the market, but also understand the interplay between all the parties to game the system as much as possible. If you work as an asset aggregate and you are searching for a source of funds you are going to do everything possible to borrow short safe and lend long risky. Depending on the asset class and level of risk, pricing as far off as 50 basis points would cause folks to drive a train through it.

We would love to help if you could think of where the greatest need is.

@Howard_Krieger,

you touch upon an important issue here with regards to optimizing returns. This topic is still some time off before we in the community will have to deal with it but it is on the radar so to speak.

There is also the issue of the community work situation. Right now we have two handfuls of crypto collateral with parameters set rather roughly. For crypto that is OK and as far as I know we have received few complaints. That will however change when we start onboarding fiat collateral where every 0.25% matters. Collateral type A pays a 4.25% stability fee while Collateral type B must pay 4.5%?! Expect the team behind Collateral type B to complain often and loudly. Multiply that by half the number of onboarded teams and you get a lot of noise, not optimal for a group of people who work largely for free.

There is also a bandwidth problem with how many collateral types the community is capable of onboarding per month while maintaining a sufficient level of quality.

Pricing off by 50 basis points? That is going to happen at times, the question is what steps we can take to identify and change these situations quickly when they happen.

Hi Kirill,

I appreciate the extra color, and I would like to ask a few more questions if that’s okay.

On the licensing issues, do you all need licensed real estate agents to effectuate the lending? Does your team have individuals/teams brokering and lending in the different states where NS operates? If your organization employs or works with licensed individuals, can you please provide their names and licensing information?

On your time with Caviar, your team (which, if the internet is correct, involved you and your current partner in New Silver, Mr. Shvayetsky), settled with the MSD. Was that settlement public? I was unable to find it online. Before the DAO considers onboarding New Silver’s assets, we should also understand, in my opinion, if the Massachusetts Securities Division placed any restrictions on you or Mr. Shvayetsky with regard to raising capital from the sale of securities. Can you please confirm that the MSD imposed no such restrictions? However, if the MSD did impose restrictions, can you provide more information?

And again, I want to thank you for your time and answering everyone’s questions diligently. For sure, those efforts should not be overlooked. As a high point, it’s really great that founders and team members make the effort to get in the forums and go over these matters with the DAO. I won’t speak for anyone else, but I certainly appreciate (and even enjoy!) the back and forth of reviewing the onboarding applications.

Hi there, happy to answer these.

  1. Because we do not originate consumer loans, in the states where we operate, no real estate (or lending) licenses are required, and we do not employ any licensed real estate agents.
  2. As far as MSD goes, the settlement was not made public. Furthermore, Mr. Shvayetsky was not party to the lawsuit, I am the only person in the team that resided in the state of MA. I can also confirm that there are no restrictions placed on myself in any regard as a result of the settlement.

I hope this answers your questions.

The Idea is awesome. Thinking about it for several years. Keep following you progress and happy to contribute if any request)

Thank you very much!

Also, we have received a number of inquires about participating in the current Centrifuge pool of New Silver loans. We appreciate your interest, the pool is currently fully funded, we will inform once a new pool opens up.

Sorry for the delayed response. it’s a quaint comparison but I see DeFI breaking off into fractal like ecosystems, where sophisticated lender/borrowers establish terms, conditions and rates. The sophisticated borrower “ask” can be fulfilled by sophisticated lenders and unsophisticated lenders at rates set by the former. I like what you said about groups and needs will evolve. Agreed.

Cross posting here as we’re currently working with the domain teams on NS-DROP collateral onboarding. We’d like to encourage anyone who has questions or feedback on this application to join our next AMA session about Centrifuge/Tinlake. It’ll take place tomorrow, Oct 15th 7:30pm CET.

It will give an overview of how our tech stack works and will go into detail about Tinlake v3 features. Would be a great opportunity for us to receive direct questions from you. Link to the call is here: https://discourse.centrifuge.io/t/community-call-october-15th-revolving-pools-and-tinlake-v3/291

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Great news. I hope with the new on-boarding process this can speed up the adoption of RWAs.

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I understand this is an old thread but couldn’t see a more recent one applicable - I was sent to this from a recent Coindesk article.

Intro: I am a creditor rights’ and real estate litigation attorney in Nebraska and Iowa, for over 20 years. I own MKR although it’s not locked into the governance contract; I note that so it is understood underlying what I am about to say I have a vested interest in seeing the MKR/DAI lending system work, and part of that should involve RWA collateral lending.

Kirill I would like you to respond to the following concern given what you said about there being no need for licensing. There are people and companies in your industry that specifically do only commercial lending and expressly state they are not a financial institution so as to avoid federal regulation like RESPA. They then do lending in states that as you say do not require licensing. But they then wrongfully conflate not having to be licensed with not being subject to state lending law. The moment a lender avoids being subject to federal lending law, it loses the benefit banks have of not being subject to state lending law. I presently am in litigation with one of your competitors who made a loan to upgrade an apartment complex in Omaha, and they proceeded with interest rates not in accordance with Nebraska law, accepted payments without applying to the principal and interest balance contrary to Nebraska law, and billed the borrower for its attorney’s fees also contrary to Nebraska law. They believed they could do all this because Nebraska did not have licensing requirements for commercial lending - which all that means is anyone can do commercial lending without advance permission from the State. There are still rules.

These loans you are making would be subject to state law. Analyzing for a just a few minutes as to Nebraska, the 13% liquidation fee likely violates Nebraska law because our nonjudicial foreclosure process permits only certain limited fees incurred to sell - publication and reasonable attorney’s fees and recording fees - to be added onto the borrower’s balance. If you are unlucky enough to have not done the paperwork correctly to qualify to do a nonjudicial foreclosure, the judicial foreclosure process can take 18 months or more and you do not recover attorney’s fees. Nebraska law forbids an interest rate of greater than 16% to an individual for any purpose and fees charged up front (stabilization fees perhaps?) and compounding are factored in to determine if more than 16% is actually being charged. The latter usury issue can be solved by always lending to a corporate entity and never an individual - a Nebraska lawyer that works in this field knows that but would the DeFi community? I think not, and rather that they would be relying on you to make sure that each loan made fully complies with the applicable state law.

So my questions are is there an understanding that your loans need to comply with applicable state lending law, and what efforts are you making to make sure of that - e.g., retention of local attorneys to advise on loan structures and draft loans?

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