I'm a blockchain security specialist and writer living in NY.
Mortgage industry record-keeping hasn’t moved on much from the papyrus technology used by the Ancient Egyptians. In fact, hard copies of transactions are still integral to the process of sourcing a mortgage today.
This is all the more inconvenient given that computers have dominated the business environment for a few decades now and the internet has made many areas of life much more efficient. Yet somehow, in this area, systems have not been updated to match the times.
For the consumer mired in this archaic set-up, the experience can be both frustrating and stressful.
The frustrations arise from long waits as the various parties liaise and transact with each other, from mortgage application to the final purchase of the property. At every stage there are intermediaries: between borrower and lender and between buyer and seller.
A lot of this process is dependent on document verification through old-fashioned signatures, with hard copies needed to be drawn up and lodged with the appropriate offices.
Each intermediary gets their cut as the fees of consumer mount up and the days turn into weeks. In fact it takes on average of 30 days to get a mortgage approved in the US but during busier times it can take anywhere from 45 to 60 days. Also before you can even make an offer for a property the buyer will typically need to have been “pre-approved”, which means going through various credit checks, drawing out the process even more.
The crossed wires and delays add to the stress levels of all concerned, especially the applicant seeing as taking out a mortgage will probably be the single largest financial transaction most of us will make in our lifetime.
Admittedly, there are legal barriers that have stalled digitization, such as the requirement to file physical documents and the lack of industry-standard digital identity protocols.
However, that lack of progress could have an upside. With one big leap the industry could adopt wholesale the value proposition represented by blockchain technology and solve many of its issues, while significantly cutting down on costs.
The decentralized record-keeping of the blockchain is ideally suited for synchronizing many of the business processes around identity verification as well as the transactional tasks associated with mortgage origination, underwriting, approval, payment and custody of funds and their timely release, title management, insurance and all the rest that accompanies those processes.
A decentralized ledger can store documentation in a way that dis-intermediates, freeing the borrower or buyer from being held hostage by an incompetent or slow intermediary. This would mean the issue of say, waiting for a lawyer to send documentation to the lender so as to to release funds into a borrowers account, would be a thing of the past, or at minimum the “it’s in the post” excuse won’t be acceptable anymore.
A blockchain solution would provide greater transparency, with all the nodes on the network having access to the documentation and the status of the smart contracts. Also, blockchain could protect everyone’s privacy as some of the process could be on a private blockchain, like details of the borrower/lender relationship, and other parts, like the title deeds, on a public one.
Lenders and brokers are under pressure from everyone involved from real estate agents, appraisers and title agents, to the consumers themselves, to change the way they conduct business, which can be a huge motivator for the industry as a whole to progress.
The optimum situation would be if there was one application programming interface (API) which all parties could plug into, perhaps acting as a middle layer between legacy systems and a blockchain, uniting all concerned parties on a trustless platform.
The big advantage for the mortgage-seeking homebuyer comes from the aggregation of services under one roof and the streamlined execution of transactions. Also, lower costs dealing with lawyers, realtors and appraisers would hopefully see some of those savings passed on to the consumer as well.
Instead of visiting a number of mortgage broker and product comparison sites, people would only need sign-up to one platform to source a mortgage from a variety of providers.
Then, once a borrower would choose the service to best match their needs, the lender could connect to the customer on the same platform, with the funds held in a smart contract and not released until the appropriate documents have been digitally signed and the loan approved. The same smart contract would be able to send the funds to the seller after the real estate agent helped the prospective buyer locate the property.
At the core of such a platform would be the capability of storing verified immutable digital identities, preferably tied to some sort of a “credit” reputation. A lot of time and energy goes into verifying and assessing borrowers’ creditworthiness, so a reputation system would greatly reduce costs.
Then, once a property had been bought and the title transferred to the new owner, the monthly payments to the lender could begin and would be managed by the same smart contract that handled custody and dispersal of the borrowed funds.
The attractions of blockchain for the industry may appear to be self-evident but progress has been slow. Now, there seem to be indications that the pace of change may be quickening,with new blockchain innovation trying to streamline processes.
For example, there is Propy, which is a blockchain-based realtor where you can buy and sell homes, although it doesn’t provide mortgages. It also processes real estate titles where appropriate. Propy is attacking one part of the homebuying business and isn’t trying to disrupt the industry as a whole.
Another project from start-up Homelend takes a more global approach, with mortgage lending as its core functionality, it enables borrowers to crowdfund a mortgage as well as tie-up all the paperwork needed to do so. Homelend says its lending criteria will be based on a much wider pool of information than traditional lenders, which should be music to the ears of millennials who are seen as less financially stable than their predecessors
Another start-up looking to shake things up is Synechron. It is starting from the lender side, looking to provide packaged solutions to help banks and other institutional lenders implement distributed ledger technology for payment and document transactions in what it describes as “an accelerator for mortgage financing”. Like Homelend, it’s bringing artificial intelligence and machine learning to the party to make, among other things, the credit-checking process as frictionless as possible.
Undoubtedly, the legal and regulatory challenges to blockchain adoption in the mortgage industry are considerable but not insurmountable. Governments and trade bodies could work together to help provide a framework for more efficient business practices but, as if so often the case, bureaucracy, vested interests and inertia can combine to hold back progress.
However, those that stand still risk being left behind. That, plus the hope of reducing costs and expediting transactions in a more timely and efficient manner are likely to encourage innovation; in fact, there are already competitors that are already showing their interest in moving into the space.
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