Blockchain for Mortgages: Compelling, But Premature?
If there's an area that cries out for the efficiencies of blockchain, it's the mortgage industry. But are institutions ready for such major change?
If there's an industry that cries out for the efficiencies and data integrity that blockchain tech promises, it's undoubtedly the US residential mortgage business.
First off, there's the size of the business. At last count, according to the Federal Reserve, there were about $10tn-worth of residential mortgages outstanding, with about $2tn in new loans being originated in a good year.
Then, there's the amount of data – most of it sensitive – that goes into and supports every loan.
"A mortgage application requires hundreds of documents and very sensitive data," Leo Loomie, senior vice president of client services at Digital Risk LLC, a mortgage processing provider, told CoinDesk. "W-2s, income statements, asset statements, bank statements, Social Security numbers – and all of that has to change hands numerous times over a variety of channels: fax, email, mobile phone."
Mortgages are complex financial instruments, agrees Jason Nadeau, executive vice president at blockchain startup Factom, writing in a recent issue of MReport, a mortgage industry publication.
"To process a mortgage from start to finish, you're looking at many documents, all with multiple versions, created by multiple parties and multiple entities editing and revising. Combined, that could be thousands of document versions, data points, all variable to revision," he said.
And that’s just at the front end, so there's increasing interest in how blockchain might be able to solve real-world workflow problems in real estate.
"The mortgage use cases for blockchain are super interesting," Loomie said, indicating he is optimistic about the technology and its potential.
So, how exactly will blockchain benefit the mortgage business? Experts see three ways in which they believe the industry could be impacted:
The first with a notable consensus is recordkeeping.
In a June 2016 report, Pamela Johnston, principal and partner, and Tim Davis, managing director for banking and capital markets at PwC, assert that blockchains could provide "immutable proof" that loan estimates were sent within timelines required by regulation.
"In the mortgage servicing process, blockchain could track the movement of payments. And in the secondary markets, it might provide transparency about the ownership of underlying assets," the report said, continuing:
Nadeau, too, sees much the same value in the technology.
He indicated that blockchains could help ensure documents and data are "vetted through compliance checks" with "proof built directly into the process".
Loomie noted that the ability to create a "fingerprint of your mortgage" that can be transferred "instantaneously" between institutions is equally appealing.
"All of the entire mortgage package, including the contract, can all live in a blockchain," he suggested.
Eli Stern, partner at Ernst & Young, sees this benefit as well, noting that blockchains could take out the "operational heavy lifting" in mortgage markets.
"All of the due diligence, all of the reporting, all of that could be streamlined and to some extent all of the effort around it would be removed. That would just tremendously streamline the whole process – from asset origination all the way through to securitization execution," he said.
Stern noted that recent regulations, such as the Dodd-Frank Act have put pressure on disclosures at the asset level.
"It's become tremendously cumbersome for securitizers,” Stern told CoinDesk. "Having data that is completely reliable and instantly accessible would make complying with all of this regulation just so much easier and reduce costs and make everything faster."
Reducing costs will likely be the driving force behind mortgage industry adoption of blockchain. "When you talk about instantaneous and secure, you are talking about cost reduction," Loomie said.
But, how much exactly?
Capgemini Consulting, in a recent report, entitled estimates those savings could amount to 11% to 22% on average processing fees per loan of $4,350, or about $480 to $957 per loan.
While a lot of those savings will be passed on to the consumer, some of them will be retained by industry participants, meaning mortgage banking should become a more profitable business, according to Loomie.
While all of this sounds compelling and long overdue, how close is the mortgage industry to actually adopting blockchain into its processes?
In some places, it already has been.
In October, Bank of China and HSBC began testing blockchain tech on a property valuation system for home loans in Hong Kong – one the banks said they plan to go live with shortly.
Loomie said he believes this partnership could but pressure on firms in the US to follow suit.
"Appraisals are a nightmare right now. Turn times are way up. If you see Bank of China and HSBC implementing it, it's the real deal," he said.
Evolution, not revolution
Nevertheless, depending on how and where it is used, experts say blockchain for mortgages could be just around the corner, or it could be years away.
The best way to look at it, then, might be to see it as an evolutionary process, not a revolution that will transform the industry all at once.
"System and technology transformation is a very time-consuming process and blockchain technology isn't free from that,” notes Angus Champion de Crespigny, financial services blockchain and distributed infrastructure strategy leader at EY.
Champion de Crespigny noted that regulatory considerations aren't to be undervalued by those considering how blockchain could capture value.
Loomie agreed. "People are still trying to confirm for themselves that this is a real secure enterprise-grade solution. It's also a complicated product and idea. It's not something that's easily grasped," he said.
Others, of course, were more bearish in the face of barriers.
"The reality is, for this to work it's going to take some thought and time,” Bart Cant, founder and community leader of Capgemini’s blockchain practice, told CoinDesk, adding:
Correction: A prior version of this article indicated that Eli Stern was a "senior manager" at EY. This has been revised.
Real estate image via Shutterstock
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