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Residential Department: BackSpace: April 2018

 

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Blockchain could transform the mortgage industry

Blockchain has been in the news a lot lately. The technology behind online cryptocurrencies like Bitcoin has many people interested in seeing whether the “distributed ledger” system that tracks all of these virtual currencies and stores the data on multiple servers all around the world can be used to tackle the immense recordkeeping needs of vast industries such as insurance, securities, land titles and mortgage lending.

Some people are wary of blockchain because of the hype behind cryptocurrencies, and others are confused by the technobabble that seems to surround any discussion of the subject. Still, innovators in various industries are starting to move forward, looking for ways to use this new digital protocol to solve some of the world’s biggest data challenges, including safely storing, tracking and verifying mortgage loan data.

Blockchain explained

“Blockchain, at its basics, is a protocol,” says Jason Nadeau, executive vice president of Factom, a company working to harness blockchain technology for the mortgage industry. “It’s a bit like saying, ‘the internet.’ There’s so many things you can do with it that it’s very easy to get it all mixed together.”

Nadeau likens blockchain today to the first internet protocols that came out for the internet in the late 1970s and early 1980s. At that time, he says, nobody cared except the “geeky networking folks.” The public didn’t get excited until those early innovators used internet protocols to create systems for sending e-mails and creating and displaying web pages.

What excites early blockchain innovators is the protocol’s ability to store data in a way that is virtually unhackable and immutable, or unchangeable. A blockchain is an actual digital chain of data, says Danny Thankachan, director of litigation support for law firm Blank Rome LLP and a blockchain expert. In a blockchain, every cell has the data of the previous cell embedded in it, along with the data of the current cell.

“Now, do this a million times — a billion times,” says Thankachan, “and you’ve created a string of transactions that are all interlinked so that it’s impossible to insert a new transaction without breaking the chain.”

Mortgage applications

The idea of a distributed ledger system may seem foreign to mortgage companies who must safely collect and store massive amounts of information and signed contracts, but that is exactly the type of recordkeeping that blockchain excels at.

Thankachan says that blockchain can be used to store any type of data, from transactional, like Bitcoin, to contracts, and even videos. “All you’re doing is creating a fingerprint of that video such that it uniquely identifies the video,” Thankachan says. “It could be a handshake deal that is videotaped.”

The upside of the distributed nature of the data is that it makes it easy to transfer that data between interested parties, like mortgage originators and underwriters or lenders and servicers. It also can improve auditing while drastically reducing costs. “With a block-chain ledger system, you no longer audit a sample,” Thankachan explains. “You audit every transaction, because it’s all machine readable.”

When I look at blockchain, I look at the lifecycle of a mortgage,
from lead generation and marketing, to origination, servicing and secondary [markets].
–Debbie Hoffman, Symmetry Blockchain 

So, what types of mortgage activities will be done via blockchain in the future? Debbie Hoffman, co-founding partner at Symmetry Blockchain, a company that is advising and assisting developers to help build out blockchain solutions, believes the technology can be used throughout the entire loan process.

“When I look at blockchain, I look at the lifecycle of a mortgage,” Hoffman says, “from lead generation and marketing, to origination, servicing and secondary [markets]. The blockchain can be used at any one of those points of entry where you have information.”

Title searches are another area where blockchain could help speed up the mortgage process. According to Thankachan, in the not-too-distant future, every plot of land could have a digital ID stored in a blockchain. When ownership changes, a new link is added to the chain to record that transaction. Cook County, Illinois, already has a pilot program, says Thankachan, and officials there plan to incorporate blockchain technology into the latest version of their county title system.

Long-term growth

Blockchain could have some issues when it comes to scaling up to larger systems and integrating between partners. When it comes to scalability, computer power, which requires a lot of energy, and speed of handling transactions are the two main roadblocks, according to Hoffman. But, she says, “There are constantly developers out there working to build faster distributed-ledger systems.”

The bigger issue may be integration, however. “The whole concept of a blockchain is that it be used by multiple parties within an industry,” Hoffman says. “If every player in this industry starts building their own and working in silos, there’s no benefit.”

Hoffman says what is holding back the mortgage industry is a lack of an organized consortium. She believes the government-sponsored enterprises or some of the larger companies or tech vendors will need to begin working together on a solution.

That time may not be too far off, according to Nadeau. He believes blockchain is following a similar path as other technological innovations, where early adopters “make some interesting noise in the space,” but then larger entities follow behind.

“I think 2018 is the year of one or two or three innovators and people saying, ‘That’s really interesting,’” Nadeau says. “… We’re three or four years away from it being more common than not.”

Thankachan has grander plans for blockchain. He envisions a world where everyone and everything has a digital ID. “This is not really going to be that sexy 20 years from now,” Thankachan says. “It’s going to be just what happens. This will be how we interact with our environment.”


 

Will McDermott is managing editor for Ask a Lender. Reach him at willm@scotsmanguide.com or (800) 297-6061.

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