Streamlining the mortgage process through blockchain
Blockchain, generally defined as a shared ledger that uses cryptography to produce immutable records to facilitate processing and tracking of information—is like a giant, continuously reconciled spreadsheet that gives access and transparency to users. Using open-source protocols, it can include all parties involved in complex transactions.
One transaction ripe for blockchain adoption is the labyrinthine mortgage process. With an estimated 66% of all homeownership encumbered by mortgages, the ordeal of document gathering, title search, credit checks, property evaluation, appraisals, and loan approvals can consume weeks and cost borrowers 2%-5% of the loan.
Blockchain can slash both time and cost. Although neither widely developed, nor a panacea (information gathering will still depend on people), it may revolutionize the existing mortgage process. The perfect disrupter, it can mechanize trust among parties so they can safely and securely exchange sensitive information.
Using ironclad cryptography, blockchain ensures old transactions cannot be altered—only new information can be added. Control of most enterprise blockchain or DLT implementations is distributed among a consortium of validators, rather than a single entity, making it less vulnerable to manipulation, fraud, and hacks. The technology mandates key decisions about governance: who can read, write, verify, and control the data, ensuring trust among the multiple parties who must interact. Information can be completely or partially private.
Blockchain is already used by Depository Trust and Clearing Corporation for stock certificates, and by Walmart to manage its supply chain. Now Amazon, making inroads into the financial services industry, has announced it will use it to enter the nearly $9 trillion mortgage industry.
In the traditional method, a borrower deposits the down payment to an escrow account, retains an attorney to prepare a contract, completes an application, and submits income verification forms that demonstrate credit worthiness, which is substantiated by a credit report. An appraiser values the property, and the title company conducts a search to verify ownership and produce a clean title (more than 25% of title searches reveal a defect). Then the loan committee approves the loan and schedules the closing. Each waystation in the process is a prospective bottleneck, and delays and expenses at each juncture are the norm.
Contrast this process with using blockchain technology. The borrower grants an institution (land registry, title company, bank, credit reporting agency) access to his personal data, and each stage is then managed securely on a blockchain, in minutes, rather than weeks. (A property’s ownership history can be downloaded in seconds, which could slash onerous title insurance fees.)
In addition to a credit report, banks could even consider a borrower’s social media profile in making the credit decision—patterns tend to reflect behavior. Blockchain technology will not eliminate all intermediaries, but it should reduce the time they take and the expense the borrower incurs to process the necessary information.
“Blockchain can also tokenize, or voucher, the mortgage,” says Paul Johnson, Senior Advisor at Harbor Peak, who provides advisory services to companies and governments on issues related to cryptocurrency, ICOs, and token-based business models. “Take an example of a $100,000 property with a 20% down payment and 80% mortgage. The lender begins with 800 tokens, the borrower 200. As the borrower pays down the loan, the lender transfers a proportionate share of tokens to him. Tokenization could change the way we capitalize mortgages and may even help avoid a repeat of the 2009 housing crisis, when home values plummeted to less than the outstanding mortgage, forcing foreclosures.”
Blockchain technology can be applied to any problem that requires information of value. The level of friction (i.e., how much money and time a customer wants to save) drives behavior, with mortgage processing but one prime example. Blockchain as a solution has already been adopted on several fronts: Amazon Managed Blockchain helps enterprises more easily track activity, and can be extended to payments, loan processing, and business transactions with suppliers and distributors.
Expect the auditor’s role to adapt as blockchain continues disrupting the way business is done, becoming more focused on verification. “Smart contracts,” which rely on an “if, then” scenario to execute, may become the preferred way to enforce performance, rather than a written document that requires courts to intervene in case of default.
Regulatory hurdles must be overcome before the technology is widely adopted, and businesses must step up to applications of the technology, but consumers, intent on saving time and trimming costs, will be a driving force, just as they have been in retail. With banks in China and Russia already using blockchain to finalize mortgages, the US cannot be far behind.
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Published on Oct 2, 2019
The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.