Blockchain in mortgage lending: Interesting, but premature?

Rage Comment : As we all know, mortgage applications require millions of documents, which contain a lot of sensitive data, and all these documents must be transferred many times through various channels (fax, email, mobile phone). Therefore, for the entire industry, the efficiency and data integrity promised by blockchain technology are very attractive. But experts point out that people are still trying to confirm for themselves whether blockchain is a truly secure enterprise-level solution. The blockchain technology solution is a complex product and idea, and it is not something that is easy to master. It will take some time and consideration for the market to truly practice blockchain.

Translation: Flora

If there is any industry that desperately needs the efficiency and data integrity of blockchain technology, it is undoubtedly the U.S. residential mortgage industry.

The first is the size of the industry: According to the latest Federal Reserve statistics, outstanding housing loans are approaching $10 trillion, and in good times, there is about $2 trillion in new lending.

Then there is a large amount of data, most of which is sensitive data, recording every loan.

“A mortgage application requires millions of documents and very sensitive data,” Leo Loomie, senior vice president of client services at mortgage processing provider Digital Risk LLC, told CoinDesk. “Tax forms (W-2s), profit and loss statements, asset statements, bank statements, Social Security numbers — all of this has to change hands multiple times through various channels (fax, email, cell phone).”

Jason Nadeau

Jason Nadeau, executive vice president of blockchain startup Factom, expressed the same view in the latest edition of mortgage industry publication MReport, arguing that mortgages are complex financial instruments.

He said:

"To process a mortgage from scratch, there are a lot of documents to look through. All of these documents have several versions, created by multiple parties, edited and revised by multiple entities."

These are the issues that come to the forefront, so there is growing interest in how blockchain can help solve real-world workflow problems in real estate.

“Blockchain for mortgages would be very interesting,” Loomie said, expressing his optimism about blockchain and its potential.

Loomie added:

“These are very painful, high-ticket transactions. When you can remove friction from the process, that’s when you’re going to get traction.”

So, how exactly will blockchain impact the mortgage industry? Experts believe there are three ways:

Better record keeping

The first thing the experts agreed on was record keeping.

Tim Davis

Tim Davis, managing director of banking and capital markets at PricewaterhouseCoopers (PwC), and Pamela Johnston, principal and partner, said in a June 2016 report that blockchain can provide “immutable proof” that “loan estimates were sent within the timeframes required by regulation.”

“In the mortgage servicing process, blockchain could track the flow of payments. In secondary markets, the technology could also provide transparency into the ownership of underlying assets,” the report continued:

“We believe blockchain is relevant at every stage.”

Nadeau sees the same value in blockchain technology.

He noted that blockchain can help ensure documents and data “pass compliance checks” and “anchor evidence directly into the process.”

Information Sharing

Loomie noted that blockchain’s ability to create a “mortgage fingerprint” that can be moved “instantly” between institutions is also attractive.

“The entire mortgage package, including the contract, could be put on the blockchain,” he suggested.

Eli Stern

Eli Stern, a partner at Ernst & Young, also sees this benefit, saying that blockchain can eliminate "operational difficulties" in the mortgage market.

“All the due diligence, all the reporting, all of that can be streamlined and, to some extent, all of the effort will be removed,” he said. “It will greatly simplify the entire process — from asset origination to securitization execution.”

Stern noted that recent regulations, such as the Dodd-Frank Act, have put pressure on assets to be made public.

Stern told CoinDesk:

“It’s become very cumbersome for securitizers. Having data that is completely reliable and accessible in real time will make complying with all these regulations much easier, less expensive, and everything much faster.”

Cost savings

Lower costs may be a driving force for the mortgage industry to adopt blockchain. Loomie said: "Instant and secure means reduced costs."

But how much will it decrease?

Capgemini Consulting said in a recent report that cost savings are expected to range from 11% to 22%, with the average processing fee for each loan now at $4,350 falling to between $480 and $957.

Loomie said that while many of these cost savings will be passed on to consumers, some will be retained by industry participants, meaning mortgage banks should become a more profitable business.

Ongoing testing

While all of this sounds very appealing and exciting, how long will it take for the mortgage industry to actually adopt blockchain in its operational processes?

This has already been achieved in some places.

In October, Bank of China and HSBC began testing the use of blockchain in Hong Kong’s real estate valuation system and said they would implement the technology in the short term.

Loomie believes this partnership could force American companies to follow suit.

“The nightmare now is valuation. Change has become a general trend. If you see Bank of China and HSBC starting to practice blockchain technology, there is no doubt about its authenticity.”

Evolution, not revolution

As for when and where it will be used, experts say blockchain’s use in the mortgage industry is either imminent or a few years away.

So the best way to look at it is probably as an evolutionary process rather than a revolution that will completely change the industry.

Angus Champion de Crespigny

Angus Champion de Crespigny, financial services blockchain and distributed infrastructure strategy leader at Ernst & Young, noted:

“System and technology transformation is a very time-consuming process, and blockchain technology is not free.”

Champion de Crespigny noted that those who think about how blockchain can capture value cannot underestimate the role of regulation.

Loomie agrees. He says:

“People are still trying to decide for themselves whether blockchain is a truly secure enterprise solution. The technology is a complex product and idea, and it’s not something that’s easy to grasp.”

Of course, others are more pessimistic when faced with obstacles.

Bart Cant, founder and community leader of Capgemini’s blockchain practice, told CoinDesk:

“The reality is that it will take some time and consideration to truly implement blockchain technology.”

“I think at this stage, the market is not ready to invest fully in blockchain technology. This situation will not change in the short term.”