Immutability, decentralization, and transparency are some of the characteristics which have attracted entities across industries to explore the potential of blockchain technology. Although most projects initiated by enterprises are in the trial phase, recent developments show that the gap between testing and real-world application of blockchain is closing.
Here’s a look at the potential that blockchain holds for the mortgage industry.
Complexity And Size
With the increasing number of home-loan takers, presence of multiple entities, requirement of endless documents, and constant need of tracking and servicing, the mortgage industry has not just grown in volume, but also in complexity. The intricacy of procedures has added friction in its ecosystem, adding to costs and delays.
This is perhaps why the mortgage industry is often considered opaque, complex, and precarious.
“The average mortgage application includes a staggering 500 pages, a number that has trended up rather than down in recent years, despite the expected benefits of technological advances,” points out a PwC report.
Since the growth of the mortgage industry usually reflects a sound economy, this makes it even more important to enhance its efficiency. In the U.S., mortgages are constantly rising and forms the largest type of debt among American consumers. The total value of mortgage debt outstanding in the U.S. reached $14.41 trillion at the end of Q12017 (all holders) as per Federal Reserve figures.
The present format of mortgage transaction lifecycle involves handoffs, especially of manual updates. Additional delays are caused by information mismatch in contracts and at many times due to bottlenecks in the process of fund release. There are even cases of mortgage fraud due to forgery in ownership records with record keeping burden adding significantly each year.
It is believed that blockchain technology can radically transform the mortgage industry. It can be applied to different stages of the mortgage process—right from record keeping, thereby creating an immutable database of ownership, transfers, as well as property valuations.
Once such a decentralized database is created, it can facilitate transfer of loans from one lender to another—by removing any ambiguity regarding information. Further, the use of smart contracts can help to speed up settlements.
All of this would reduce due diligence, review time and thus the audit and compliance burden—translating into leaner expenses.
The blockchain technology has two essential features—distributed ledgers and smart contracts. According to a Capgemini report, “The mortgage loan industry will benefit significantly by adopting smart contracts. Consumers could potentially expect savings of $480 to $960 per loan and banks would be able to cut costs in the range of $3 billion to $11 billion annually by lowering processing costs in the origination process in the U.S. and European markets.”
In addition to trimming costs, blockchain offers security and trust. IBM highlights a use-case. Under normal conditions, a lender’s mortgage rate might equal the prime rate plus a certain percentage. However, if a dishonest lender tries to charge a higher rate to the mortgage by presenting incorrect information, blockchain will act as a hurdle that the lender will feel impossible to cross. With distributed ledger technology, the actual data from a specific date will be accessible to participants and thus misinforming isn’t possible.
Mphasis is working on providing blockchain solutions for the mortgage industry across three use-cases: mortgage servicing rights transfer solution, identity management system, and fraudulent transaction detection enablement.
One important development has been the introduction of a blockchain technology solution for property valuation by the Bank of China Hong Kong (BOCHK) and Hong Kong Applied Science and Technology Research Institute (ASTRI). The creation of a blockchain-based decentralized database of property valuation can overcome the issues of repetitive or duplicative survey of properties. Once the latest valuations are up on the blockchain, the same will be accessible to entities involved, cutting across the cost and time involved in such activities.
In March 2017, Factom, Inc. released Factom Harmony, the first practical blockchain solution for the mortgage industry that allows users to store and create immutable mortgage records. The solution is backed by three additional products—Audit Room (compliance evidence, quality control functions, audits, origination, and post-closing reviews), Due Diligence Room (collateral, review data and chain of credit), and Servicing Room (unalterable record of borrower communications, documentation and data).
The adoption of blockchain in the primary mortgage market has the potential to overhaul its complex nature by adding speed, transparency, security and smoothness to processes. However, given the magnitude in terms of volume and value, there is a long way before blockchain technology becomes woven into the fabric of the mortgage industry. However, the day this happens, it will enhance the efficiency even in the secondary market (mortgage-backed securities) as subjectivity would become a thing of the past.