By Alex Lielacher
“Blockchain” has grown from a popular fintech buzzword into a technology that is currently disrupting a wide range of areas within the financial services industry. Trials using the distributed ledger technology that underlies the digital currency bitcoin are currently underway, with the aim to digitize and improve the operational processes of securities settlement and clearing, debt issuance, global payments and more.
Another area within the financial sector that is ripe for blockchain disruption is the mortgage market. A market that currently involves lengthy paper-based processes could easily be digitized and made more efficient through the adoption of distributed ledgers and smart contract technology.
Today, the mortgage process can take up to 60 days from offer acceptance to sale completion and involves a number of financial, legal and real estate intermediaries, each adding time and fees to the transactions. Also, real estate registry records are largely paper-based and centralized, involving several governmental agencies, making the title transfer a lengthier process than it needs to be.
Blockchain and the Mortgage Market
Blockchain technology can provide solutions that would greatly improve the mortgage transaction process in two main ways.
First, a public ledger that includes real estate titles, planning permissions, deeds as well as other associated information could be developed for the mortgage industry. Such a ledger could be easily accessible and publicly available to make the mortgage process more efficient by reducing the time it takes to collect all required information to conclude a mortgage transaction.
According to business consulting firm Synechron, “[The] blockchain could save the mortgage industry over £0.5 billion per annum and reduce typical real-estate transaction times from 40 days to 30 [in the U.K.]. And, if the Land Registry put title documentation and asset ownership on a public blockchain we believe further savings of a similar size could be realized.”
In countries such as Sweden, blockchain-powered land registry projects are already underway.
Second, a permissioned ledger could be used for the mortgage loan funding management process that would involve leveraging smart contracts to digitize mortgage documents and include automated mortgage payments. This, in turn, would result in a substantial drop in operational costs and processing time of mortgage transactions, which would be beneficial to both the consumer and mortgage industry players.
According to a report by Capgemini Consulting, “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.”
The report also noted: “Smart contracts could reduce the cost and time involved in this process through automation, process redesign, shared access to electronic versions of physical legal documents between trusted parties, and access to external sources of information such as land records.”
Not Without Challenges
Given the benefits the blockchain can bring to the mortgage market, it should only be a matter of time before mortgages will be “on the blockchain.” However, blockchain adoption in the mortgage industry as well as in the overall financial industry does not come without its challenges.
Currently, there is no legal or regulatory framework for blockchain applications, which also means that smart contracts are not (yet) legally binding. Before smart contract legislation will be written, it will be very difficult to enforce them in dispute scenarios. The interoperability with existing systems in the financial industry could be another challenge that blockchain adoption must overcome, at least until the industry is able to agree on the use of a select few blockchains for each sub-sector of the industry. Furthermore, data privacy can become a hindrance to blockchain adoption as all distributed ledgers will have to be able to adhere to each jurisdiction's data privacy laws, which can be tricky for publicly-viewable ledgers.
However, once lawmakers have caught up with the technological innovations in the blockchain sphere and can agree on adequate rules and regulations governing distributed ledger solutions and smart contracts, we can expect to see a more efficient mortgage market as well as cheaper mortgages in the future.